Topic 6 Flashcards
What is globalisation?
refers to the increasing interconnectedness of countries, where events in one country impact others, and activities such as travel, trade, and communication span across borders
How has travel contributed to globalisation?
A: Travel between countries has become quicker, easier, and cheap, facilitating the movement of people and goods around the world
How has communication technology (ICT) affected globalisation?
A: ICT has made communication faster and more efficient, allowing instant contact between people and financial markets worldwide.
How do businesses benefit from globalisation in terms of trade?
A: Businesses can easily trade across borders by sourcing raw materials from one country and exporting goods to another. Internet shopping also allows consumers to buy products globally
How does migration influence globalisation?
A: Migration brings cultural diversity as people take their cultural preferences to new countries, influencing demand for various goods and services like food and fashion
What is an example of a business sector that has expanded through globalisation?
A: Financial services providers have expanded activities across national borders, establishing offices worldwide and forming multinational organisations through takeovers and mergers.
How does HSBC exemplify globalisation?
A: HSBC has expanded into over 65 countries by acquiring local financial services providers and rebranding them under the HSBC name
What role does internet shopping play in globalisation?
A: allows individuals to purchase goods from different countries, with air transport enabling fast delivery
How do multinational corporations contribute to globalisation?
A: they operate in multiple countries, increasing economic interconnectedness and enabling goods, services, and capital to flow across borders efficiently
What is the general definition of globalisation
refers to the international integration of business, industry, and society through advancements in technology, communication, and migration. It is commonly described as:
• The trend towards a single global economy and society.
• A process of increasing international networking, linking previously isolated communities and economies
What is the IMF, and what does it aim to achieve
The International Monetary Fund (IMF) is an international body comprising 190 countries. Its aim is to:
• Promote international cooperation on exchange rates and other economic matters.
• Ensure the stability of the international monetary system, including exchange rates and international payments, enabling countries and their citizens to transact with one another.
(IMF, 2019)
How does the IMF define globalisation, and what are its key driving factors
The IMF defines globalisation as:
• “The process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies” (IMF, 2002).
Key factors driving globalisation:
• Increased trade liberalisation.
• Advances in information and communication technology (ICT)
What are the positive aspects of globalisation
Supporters view globalisation as beneficial because:
• It improves the standard and range of products.
• It leads to consistency in services across different countries.
What are the criticisms of globalisation
Critics argue that globalisation:
• Undermines local culture in countries where multinational corporations operate.
• Leads to depersonalisation, as people feel the “one size fits all” approach ignores local preferences and traditions
How do financial service providers adapt to criticisms of globalisation
Many financial providers strive to balance being global with being local:
• They aim to keep customers loyal by adapting to local needs.
• Example: HSBC marketed itself as “The world’s local bank,” emphasising its global reach while understanding local markets.
However, after the 2007–2008 global financial crisis, HSBC dropped this tagline (Quinn, 2011)
What is another criticism of globalisation related to offshoring
Globalisation is criticized for increasing offshoring, where jobs and production are moved to countries with lower costs, impacting local employment in the home countries
How does globalisation in financial services illustrate its interconnectedness
means that strategic decisions made by providers in one country (e.g., UK) can significantly impact global operations. Events in one part of the world, such as the 2007–08 financial crisis, affect economies worldwide due to interconnected markets
What triggered the 2007–08 financial crisis in the US
The crisis was triggered by the sub-prime mortgage market in the US:
• Banks provided mortgages to high-risk borrowers who could not afford them.
• Rising interest rates made it difficult for borrowers to repay loans, leading to defaults and home repossessions.
• Falling house prices meant banks could not recover their loans through repossessed home sales.
How did the repackaging of mortgage debts contribute to the financial crisis
Banks repackaged mortgage debts into securities sold to investors and other banks.
• As defaults increased, these securities lost value, becoming “toxic debt.”
• Financial institutions holding toxic debt faced huge losses, spreading the crisis globally
What is the “credit crunch,” and how did it arise during the financial crisis
The credit crunch occurred when:
• Uncertainty over the value of toxic debt made banks stop lending to each other.
• This lack of lending caused a freeze in the global financial system.
• The first UK bank affected was Northern Rock, heavily reliant on global money markets to fund its mortgages
What measures were taken to prevent the collapse of the UK banking system during the crisis
The UK government injected funds to support failing banks to avoid systemic collapse. This action was necessary due to the unethical lending practices in the US, which had infected banks globally through interconnected financial systems
What does the 2007–08 financial crisis reveal about the risks of globalisation in financial services
The crisis demonstrated that failures in financial services in one country could threaten the stability of the entire global financial system due to integrated markets and daily cross-border banking transactions
What is a criticism of globalisation related to large multinational corporations?
Globalisation has led to the emergence of powerful multinational corporations that:
• Dominate markets, making it difficult for small local businesses to compete and survive.
• Integrate extensively in sectors like financial services, taking customers from smaller rivals.
How do mergers and acquisitions relate to globalisation
They are common in globalisation, where large corporations:
• Buy smaller rivals, increasing their size and power.
• Often result in redundancies due to overlapping operations.
• Can bring increased employment opportunities when entering new markets.
Authorities encourage limits on mergers to maintain competition and consumer choice
Provide an example of a successful acquisition during globalisation
• In 2004, Abbey was purchased by the Santander Group (a Spanish bank).
• Despite job losses, Santander was better protected during the 2007–08 financial crisis, ensuring Abbey’s stability and improved resilience
Provide an example of an ill-advised acquisition during globalisation
• Royal Bank of Scotland (RBS) participated in acquiring Dutch bank ABN Amro.
• ABN was less valuable than RBS had estimated, leading to substantial losses in 2009.
• RBS required government funding to remain afloat.
How does globalisation affect competition in financial services
• UK providers face increased competition from overseas providers, who can operate locally or through the internet at lower costs.
• Local providers must adapt to deliver better services and lower prices to remain competitive
What strategic decisions do UK providers face due to globalisation
- Expanding Overseas:
• Providers may allocate resources to foreign markets, balancing UK commitments with global opportunities.- Customer Impact:
• Expansion may lead to reduced product standards or service levels in the UK.
• Losses during the 2007–08 crisis forced providers like RBS to sell international assets (e.g., stakes in the Bank of China)
- Customer Impact:
What is outsourcing, and what functions are typically outsourced
is the process of hiring another provider to perform functions previously handled in-house.
Examples of outsourced functions:
• Payroll
• Call centre operations
• Data processing
• Book-keeping (basic accounting)
• Computer programming
What are the benefits of outsourcing to a provider
- Enables the provider to focus on core functions (e.g., investment fund management, insurance underwriting).
- Cost savings due to economies of scale achieved by the outsourced company, which specializes in specific processes
What is offshoring, and why do companies choose to offshore tasks
Offshoring involves moving company functions to overseas locations to reduce operational costs.
Reasons for offshoring:
• Access to skilled labour in lower-cost countries (e.g., India, Indonesia, South Africa, Philippines).
• Lower wage costs due to lower cost of living in those countries
What activities do UK providers commonly offshore
Call centre work.
IT and data-processing tasks
How does technology make offshoring easier
Technology allows overseas employees to:
• Receive data electronically.
• Process it quickly and securely.
• Provide access to results as efficiently as if they were local
What is the main difference between outsourcing and offshoring
Outsourcing: Shifts tasks to another company, which can be local or international.
Offshoring: Specifically moves tasks to overseas locations to benefit from lower costs.
What are the customer benefits and challenges of outsourcing and offshoring
Benefits:
• Lower-priced products and services.
Challenges:
• Customers may feel disconnected, especially with overseas call centres.
• Interaction can feel impersonal
What are the potential risks of outsourcing and offshoring for a company’s reputation
Loss of jobs among the provider’s employees.
Damage to reputation with stakeholders, including customers and employees.
What has been discussed in the post-crisis period to prevent future financial crises?
Discussions focus on how financial regulations can be tightened to prevent another crisis.
Key concerns include:
1. Toxic debt as a significant factor.
2. Irresponsible borrowing on international markets.
How did banks contribute to the financial crisis through borrowing
• Leading up to the crisis, banks borrowed trillions of pounds on international markets.
• This borrowing was used to fund lending but not based on the deposits of customers in current and savings accounts
What measures were introduced to discourage global borrowing by UK banks
• In 2010, the UK government imposed a bank levy of 0.088% on the value of bank debts (excluding savings deposits).
• This levy was increased to 0.21% in 2015.
• The levy excluded overseas activities of UK banks
What criticisms were raised about banks’ behavior during and after the crisis
- Payment of large annual bonuses to investment bankers and senior staff.
• Encouraged excessive risk-taking.- Reluctance of banks to lend money to businesses for expansion
What was “Project Merlin,” and what did it achieve
• Project Merlin was an agreement between the UK government and major banks (RBS, Lloyds, HSBC, Barclays).
• Outcomes:
• Banks paid lower bonuses to employees.
• Banks made more money available for business loans
What arguments exist against putting too much pressure on the financial sector
• Critics argue that financial pressure could harm the UK economy, given its reliance on the sector.
• If overregulated, banks might move operations to other financial centers like Mumbai, Shanghai, or Dubai, where regulations are less strict
What are the differing views on the measures taken to date to regulate the financial sector
• Some believe the measures do not go far enough to address systemic risks.
• Opponents argue that overregulation could harm the financial sector’s role in the UK economy
What is the global economy, and how does it relate to the UK economy
• The global economy refers to the activity of all national/regional economies.
• The UK economy is a part of the global economy, interconnected through trade, financial services, and global events
How do local and global economies affect financial providers
• Locally: Changes in interest rates or job market setbacks can impact them.
• Globally: Events in other countries influence imports, exports, companies, employees, and consumers.
Why is trade between countries important for the global economy
• Countries trade for essential supplies (e.g., oil, rice, microchips).
• Many UK jobs depend on demand abroad for goods and services (e.g., agriculture, pharmaceuticals, London taxis).
• Financial services are a major UK export industry.
How does globalisation affect UK financial providers
- They face competition from businesses based in overseas economies.
- Providers may be part of groups based overseas or have international offices.
- Strategic decisions must consider both local and global conditions
What are exchange rates, and why are they important in global trade
Exchange rates determine the value of one currency relative to another.
• Changes in exchange rates impact the price and competitiveness of goods in international markets
How do changes in exchange rates affect UK goods in European markets
• If sterling strengthens against the euro:
• UK goods become more expensive for European buyers.
• UK manufacturers may need to cut prices (lower profit margins) or risk losing sales.
• If sterling weakens against the euro:
• UK goods become cheaper for European buyers
How are exchange rates influenced by financial markets
• A strong US economy can lead to:
• Higher US interest rates.
• Rising US stock markets.
• Increased demand for US bonds and shares.
• Increased demand for dollars strengthens the dollar’s exchange rate.
What are the knock-on effects of fluctuations in exchange rates
Fluctuations affect trade relationships between countries, altering competitiveness, profit margins, and sales volumes.
What is the primary responsibility of the Bank of England’s Monetary Policy Committee (MPC)
The MPC is responsible for setting the Bank rate in the UK, which influences the demand for and supply of the pound sterling, aiming for a stable inflation rate
How does an increase in UK interest rates affect consumer spending and demand for UK goods
An increase in interest rates makes borrowing more expensive, reducing consumer spending. This leads to a decrease in the demand for UK goods and services
How do higher UK interest rates affect foreign trade
Higher interest rates increase the value of sterling in international markets, making UK goods more expensive for foreign consumers and reducing demand for UK exports
What happens to the exchange rate of the pound sterling when UK interest rates increase
The demand for sterling strengthens, increasing its value against foreign currencies, which makes UK goods more expensive internationally
What is the effect of a reduction in interest rates on the UK economy
A reduction in interest rates makes borrowing cheaper, potentially increasing consumer spending and demand for UK goods and services. It also weakens the value of sterling, making UK exports more competitive internationally
Why did the pound rise in value against the euro after the financial crisis
The pound’s rise was not due to improvements in the UK economy or interest rates but because the euro’s value fell. This was caused by severe financial and economic problems in some eurozone countries, which threatened the euro’s existence as a currency
How have changes in sterling’s purchasing power affected UK imports and exports since 2009
Sterling’s increased purchasing power made imports cheaper and exports more expensive. However, the goods and services the UK exported were still in demand because they were cheaper than in previous years. This helped sustain export demand and limit unemployment in the post-crisis years
What is the purpose of international trade organizations
These organizations aim to coordinate economic policies among countries to prevent harmful actions and achieve optimal outcomes for the global economy. However, differing national interests often make it challenging to reach a consensus
What were the economic effects of the 2007–08 global financial crisis on employment
The crisis led to job losses, pay cuts, and a shift to part-time work for many people
What are protectionist policies, and why are they controversial
Protectionist policies prioritize a country’s economy and labor force by measures like subsidies to industries or import taxes. They are controversial because they prioritize domestic interests over global trade, which can harm other countries
How has free trade influenced economic development since World War II
The end of protectionism and the growth of free trade have significantly accelerated worldwide economic development
What role do international trade organizations play in global trade
They promote free trade and economic cooperation to sustain the advantages of globalization and economic growth
What is the role of the WTO World Trade Organization
The WTO promotes cooperation and trade among over 160 member countries. Its primary function is to ensure that trade flows smoothly, predictably, and freely, while also providing a forum for negotiating trade agreements, settling disputes, and maintaining a system of trade rules
What are some examples of regional economic unions, and how many members do they have
• European Union (EU): 27 member states.
• Association of Southeast Asian Nations (ASEAN): 10 members.
• Caribbean Community (CARICOM): 15 full members and 5 associate members
What is Gross Domestic Product (GDP), and why is it important
GDP measures a country’s economic activity based on its total output of goods and services at market prices. Rising GDP indicates economic growth, higher living standards, increased employment, and greater production, showing the economy is performing well
What does GDP per capita measure, and what are its limitations
GDP per capita is the total GDP divided by the number of people in the country, indicating the average economic output per person. However, it can mask income inequalities, as some individuals may earn far more than the average, while the majority earn much less
What is the ideal type of economic growth, and what happens if growth is too rapid
The ideal economic growth is steady and sustainable. Rapid growth can lead to an “overheated” economy, where businesses cannot meet demand, leading to price increases and inflation
Why must GDP figures be adjusted for inflation
Inflation can cause apparent increases in GDP due to rising prices rather than increased production. Adjusting for inflation provides a “real” GDP figure that accurately reflects economic performance
What is the ‘boom and bust cycle’
It is a cycle of rapid economic growth followed by falling output, a return to growth, and then a recession
How did the ‘boom and bust cycle’ affect the UK in the 1990s and 2000s
The economic boom led to belief in unending growth. However, financial institutions failed to prepare for the end of this period, leading to a deep recession after 2007
What environmental impacts can excessive economic growth cause
A: - Increased burning of fossil fuels
• Shrinkage of green areas
• Increased congestion in urban areas
Define ‘sustainable growth.’
Growth controlled enough to continue into the medium and long term, balancing economic, environmental, and social factors
Growth controlled enough to continue into the medium and long term, balancing economic, environmental, and social factors
Higher productivity—producing more goods and services with the same resources
What is vital for achieving sustainable growth apart from efficient equipment and technology
Investing in education to ensure the labor force has the necessary knowledge, skills, and abilities
What are the limitations of traditional economic measures like GDP and productivity
They focus only on financial output and ignore non-financial aspects like quality of life, equality of healthcare, leisure time, and stress levels.
What did the UK government do in 2011 to address limitations of monetary-based measures?
A: The Office for National Statistics (ONS) launched a ‘happiness survey’ to assess life satisfaction and well-being.
Q: What findings were reported by the ONS from the happiness survey between 2011/12 and 2012/13?
A: - Improved personal well-being
• Increased life satisfaction
• Greater sense of life’s worth
• Reduced anxiety levels
Q: What were some criticisms of the UK’s happiness survey?
A: Critics argued it was a distraction from the economic recession and a way to deflect attention from its effects
Q: What is the Human Development Index (HDI)?
A: A measure that goes beyond economics, using life expectancy, education, and income to assess a country’s development
Q: What happens to share prices and investor appetite during a fall in economic growth?
A: Share prices typically fall, and there is a reduced appetite for shares
How do providers of savings and investment products respond to falling markets?
A: They offer products encouraging riskier investments, such as collective investment funds, unit trusts, investment trusts, and open-ended investment companies (OEICs)
Q: What are OEICs?
A: Open-Ended Investment Companies (OEICs) specialize in investing in smaller companies, newly established firms, and global investments.
Q: How do individuals typically behave in times of economic uncertainty?
A: They tend to prioritize safety by moving their money into safer assets like gilt-edged securities or corporate bonds and reducing their exposure to risk
Q: What is the ‘credit crunch,’ and when did it become evident?
A: The credit crunch refers to reduced lending by banks and stricter borrowing terms, which became prominent during the 2007–2008 financial crisis
Q: How did the UK government respond to the credit crunch?
A: It introduced policies encouraging banks to lend more to creditworthy individuals and businesses
Q: What was the behavior of banks and other lenders following the financial crisis?
A: They became cautious, accepting low profits or even losses, as they recognized that excessive lending was a cause of the crisis
Q: How did individuals react to low interest rates and government encouragement to ‘shop for Britain’?
A: Many focused on paying off debt due to fear of unemployment, leading to reduced borrowing and spending despite lower interest rates
Q: How did falling interest rates affect holders of variable-rate mortgages?
A: Their monthly payments decreased, allowing them to overpay their mortgages to reduce debt faster, rather than spending the extra cash.
Q: Why did the government’s hope for increased spending due to lower interest rates fail?
A: Existing mortgage holders used their savings to reduce debt rather than increasing consumer spending
Why might investment companies find it difficult to identify good opportunities during a global economic downturn?
A: They may struggle to find countries or markets performing well when the world economy is performing poorly, as most investors are losing money
Q: What skills are essential for stockbrokers and fund managers during a recession?
A: The ability to identify companies worth investing in despite a falling market. Successful stock pickers maintain or increase the value of investment portfolios
Q: How do consumer spending habits change during a recession?
A: Consumers still purchase essential goods (food, drink, household items, transport) but focus on finding cheaper alternatives, increasing demand for low-priced products
Q: What type of businesses tend to thrive during a recession?
A: Businesses specializing in low-cost products and services see increases in sales and profits during economic downturns
Q: What is the ‘Aldi effect’?
A: The success of no-frills, low-cost supermarkets like Aldi during recessions, as shoppers switch to reduce their expenses
Q: When did Aldi and Lidl begin operating in the UK, and what is their significance?
A: Aldi started in 1989, and Lidl in 1994. Both are German-owned and exemplify globalization, growing significantly during recessions
Why do low-cost operators like Aldi thrive during economic downturns?
A: They attract shoppers from established supermarkets by offering significantly lower prices on essential goods.
Question: How do successful stock pickers capitalize on recessions, and what challenges did Tesco face during the financial crisis
Answer:
• Stock Picker Strategies: During recessions, successful stock pickers invest in low-cost international companies, like supermarket chains (e.g., Tesco, Asda, Sainsbury’s, Morrisons), which can prosper by appealing to cost-conscious consumers.
• Tesco’s Challenges:
• Continued profit declines throughout 2013 due to losing customers to UK discounters.
• Financial difficulties in global expansion efforts.
• Forced to sell its US stores and merge its Chinese stores with a local rival
Question: Why is it essential for investors to stay updated on companies’ market strategies
Investors must remain aware of major global economic changes and trends to anticipate how companies may be affected (positively or negatively). This allows them to make informed decisions and adapt their investment strategies accordingly.
How does a recession affect employment and earnings
• Employment: Recessions typically cause rising unemployment rates.
• Earnings:
• Workers retaining jobs face reduced hours or pay, resulting in lower real wages.
• Real wages decline further when inflation outpaces nominal earnings growth
What financial challenges do individuals face when they lose their job, and what solutions might they consider
• Challenges:
• Loss of income to finance debt repayments, risking defaults on mortgages and other loans.
• Potentially leads to bad credit or even bankruptcy.
• Solutions:
• Insurance policies that cover mortgage and monthly repayments if made redundant.
• Financial providers may promote these products during periods of uncertainty
How did emerging markets perform during the economic downturn, and what are the “BRICS” and “MINT” countries
• Performance: While developed countries experienced downturns, emerging markets experienced high economic growth, creating challenges for established economies.
• Groups:
• BRICS: Brazil, Russia, India, China, South Africa.
• MINT: Mexico, Indonesia, Nigeria, Turkey
How has demand for commodities from emerging markets impacted global economies
• High demand for resources like oil, metals, and foodstuffs from emerging markets pushed global commodity prices higher.
• This led to inflation in countries dependent on imports of these commodities, such as the UK
How did the UK experience inflation following the financial crisis, and what was its impact on households
• Inflation: The UK did not experience “runaway” inflation but had a Consumer Prices Index (CPI) above the government’s 2% target for several years post-crisis. CPI only fell below the target in February 2014.
• Impact:
• British families faced reduced earnings and higher prices for essential goods and services.
• This significantly affected their financial planning
Why is the wider European economy significant for the UK’s financial services consumers and providers
• The UK’s economy is intertwined with the European Union (EU) due to high levels of trade.
• The financial crisis impacted European countries, particularly those in the Eurozone (countries using the euro), which were hit hardest
What economic conditions must a country meet to adopt the euro
- Fiscal Stability: Maintain policies for raising taxes and spending on public services responsibly.
- Independent Central Banks: Free from political influence.
- Low Inflation and Interest Rates: Ensure economic stability.
- Stable Currency: Over a sustained period.
How did the financial crisis affect the euro and its member countries
• Struggling Countries: Greece, Ireland, Portugal, Spain, and Italy struggled to pay debts.
• Bailouts: Wealthier eurozone countries provided financial aid to stabilize the euro and prevent collapse.
• Euro’s Survival: Some predicted the euro’s failure, while others believed strong institutions would help weather the crisis
Which countries joined the eurozone post-crisis, and when
• Estonia: Joined in January 2011.
• Latvia: Joined in January 2014.
• Lithuania: Joined in January 2015
How did unemployment in the EU change following the financial crisis
• November 2014: EU-wide unemployment was at 11.6%.
• Some EU member states faced even higher unemployment rates.
• Although unemployment improved after this period, it rose again in 2020 due to the effects of COVID-19
How do governments fund public spending aside from taxation?
A: Governments fund public spending by selling government bonds on the world financial markets.
Why must governments offer an interest rate on their bonds?
A: Governments must offer an interest rate high enough to attract investors, who require compensation for the risk of potential default and the assurance they will get their money back when the bond matures
What happens to bond interest rates when a country’s economic problems increase?
A: When economic problems increase, the perceived risk of default rises, and the government must offer higher interest payments to attract investors and sell enough bonds to fund public spending
What challenges did countries like Greece, Ireland, Portugal, Spain, and Italy face in the global bond market?
A: These countries struggled to sell a sufficient volume of bonds at interest rates they could afford to pay
What was the consequence for countries unable to sell bonds at affordable interest rates?
A: Countries such as Greece, Ireland, Portugal, Spain, and Italy were forced to seek financial assistance from the International Monetary Fund (IMF) and the European Union.
What is the relationship between a country’s economic health and the global monetary system?
A: There is a strong interaction between the two, as a country’s economic and financial health affects its ability to participate in global financial markets and impacts investor confidence globally.
Which government department is responsible for setting economic and financial policy in the UK?
A: HM Treasury is responsible for setting economic and financial policy in the UK
What role does the Bank of England play in the UK economy?
A: The Bank of England is the UK’s central bank. Its Monetary Policy Committee (MPC) meets regularly to decide whether to change interest rates and publishes the minutes of these meetings, which include discussions about the current economic situation
How does low inflation affect people’s financial behavior?
A:
• Low inflation gives people a sense of security and confidence in the value of their assets.
• It encourages investment, as individuals believe the value of their assets won’t be eroded.
• Conversely, rising inflation makes people uncertain about the future and motivates them to seek investments that will outpace inflation
What are the effects of low interest rates in the UK economy?
A:
• Borrowing becomes cheaper, encouraging people to borrow more.
• Demand for housing increases, leading to rising house prices.
• Savers may earn low returns and turn to riskier investments, such as those tied to stock market movements, to achieve higher returns
What issues arise from high personal debt in the UK when interest rates rise?
A:
• People may struggle to repay loans, credit card debt, overdrafts, and mortgages.
• Financial institutions that lent irresponsibly may face difficulties, as borrowers are more likely to default
How has the UK stock market performed in recent years, and what trends have emerged?
A:
• The UK stock market has performed poorly, mirroring trends in global markets.
• Demand for stock-based products (e.g., unit trusts, investment trusts, stocks and shares ISAs) has decreased.
• Consumers have shifted toward fixed-term savings accounts, which guarantee a return of the invested principal
How has the UK’s non-participation in the euro area impacted its economy?
A:
• A weaker pound sterling against the euro increases the cost of imports from Europe.
• However, UK products become cheaper for both domestic and international buyers, boosting exports
What was the impact of the financial crisis on the UK economy?
A:
• Banks significantly reduced lending to each other and customers, leading to a credit crunch.
• A lack of confidence contributed to reduced economic activity and triggered a recession, often resulting in high unemployment and business closures
What was the central aim of the UK government from 2010-2015 regarding public debt?
A: The central aim was to reduce the high level of public sector debt that had accumulated before the financial crisis and worsened due to the bank bailouts and recession (which reduced tax revenues)
What fiscal measures did the UK government take to reduce the deficit during 2010-2015?
A:
• Cuts to public spending.
• Increased taxes, including raising the Value Added Tax (VAT) from 17.5% to 20% in 2011
What was the unintended short-term consequence of the UK government’s austerity policies?
A: These policies initially worsened unemployment, creating a vicious cycle of reduced spending and economic activity
Explain the vicious cycle of lending, spending, and unemployment described in the material.
- Banks fear defaults, so they lend cautiously and only to creditworthy customers.
- Individuals and businesses can’t get financing, reducing their spending on consumption and investment.
- Demand for goods and services falls, leading to lower economic activity.
- Firms cut spending on expansion, reducing job creation and making staff redundant.
- Unemployment rises, causing people to fall behind on debt repayments, worsening the economic cycle
How did the Bank of England respond to encourage spending and borrowing?
A:
• The Bank of England significantly lowered the Bank Rate.
• In 2021, the rate stood at a historic low of 0.1% to combat the economic effects of COVID-19.
• Before 2016, the Bank Rate had been held at 0.5% for over seven years following the financial crisis
Why did the policy of low interest rates fail to achieve its full desired effect?
A:
• High levels of personal debt made UK consumers focus on paying off debt rather than spending.
• Fear of unemployment also discouraged consumer spending and investment.
When did the UK economy begin to recover after the financial crisis?
A: Growth rates started to rise, and unemployment began to fall in early 2014, several years after the crisis.
What were the impacts of extremely low interest rates on savers and borrowers after the financial crisis
Borrowers: Benefited from lower costs of repaying debts.
• Savers: Faced challenges:
• Earned very little interest on savings.
• Returns failed to keep up with inflation.
• Particularly harmful for pensioners relying on interest income
How can major world events impact financial services consumers
• World events (both catastrophic and positive) influence the operating environment of financial services providers.
• These events ultimately affect financial services consumers by reshaping economic and market conditions
What were the key causes and consequences of the 2007-2008 financial crisis
• Causes:
• Failures in financial institutions.
• Subprime mortgage defaults in the U.S. spread rapidly due to globalization of financial markets.
• Consequences:
• Global recession, with long recovery periods for many countries.
• Damaged consumer confidence in banks and financial institutions.
• Bailouts were used to prevent institutional collapse
Why did the 2007-2008 financial crisis spread so quickly across the globe
• The interconnected nature of financial markets and global trade meant issues in one region (e.g., U.S. subprime mortgage defaults) rapidly affected other parts of the world.
What happens to creditors when a bank fails?
A: Creditors, such as ordinary savers, pensioners, and businesses, may lose their money as the bank cannot repay deposits
How does the Financial Services Compensation Scheme (FSCS) help?
A: It provides some protection for individual depositors in case of a bank failure.
What is the risk of large financial institutions failing?
A: If one large institution defaults, it threatens the entire global financial system
What caused the collapse of Northern Rock?
A: Dependence on frozen financial markets for funding led to its failure
How did the banking crisis impact the global economy?
A: It caused a recession as banks stopped lending, which slowed global economic activity
Q: How does recession in one country affect others?
A: It reduces demand for goods and services, spreading economic slowdown globally.
Q: What are commodities?
A: Raw materials (e.g., oil, metals, agricultural goods) traded on formalized markets, with fluctuating prices similar to shares
Q: Why is oil considered the most important commodity?
A: It is essential for energy, transport, and manufacturing, making its price fluctuations highly impactful
Q: How does a fall in oil prices affect countries like the UK?
A: It benefits them as they import most of their oil and gas supplies, reducing costs for consumers and businesses
Q: What happens to oil-exporting countries when oil prices drop?
A: Countries like Russia, Saudi Arabia, and Qatar see significant declines in profits
Q: How do fluctuations in other commodity prices affect businesses?
A: Changes in prices of metals (e.g., copper) impact manufacturing costs, while foodstuff prices affect food production
Q: How do commodity price fluctuations affect individuals?
A: Indirectly, they influence personal finances by driving inflation
Q: What are the economic and financial effects of a country being at war?
A:
• Taxes may rise, or the government must borrow more money to finance the war.
• This can lead to immediate and long-term effects on financial markets, personal finances, and inflation.
Q: How does increasing income taxes during a war impact individuals?
A:
• It reduces the take-home pay of employees earning more than the annual tax-free allowance.
• Increases in sales taxes (e.g., VAT, duty on fuel, cigarettes, and tobacco) lead to higher inflation, affecting personal budgets.
Q: How can the government raise money to finance a war?
A:
• By issuing government bonds (known as “gilt-edged securities” or “gilts” in the UK).
• To attract investors, higher interest rates may be offered, which can lead to broader economic impacts
Q: What are the knock-on effects of higher interest rates caused by war financing?
A:
• Increased rates on savings accounts and share prices.
• These changes can affect individual finances and financial planning
Q: What is the opportunity cost of going to war?
A:
• It is the value of other goods and services that could have been purchased with the same money used for war expenses.
Example:
• Hillary Clinton highlighted that the Iraq war (costing over $1 trillion) could have provided:
• Healthcare for 47 million uninsured Americans.
• Pre-kindergarten education for all American children.
• Solutions to the housing crisis.
• Affordable college for every American student.
• Tax relief for millions of middle-class families.
Q: How much did the Iraq war ultimately cost?
A:
• The final cost of the war was estimated at $1.922 trillion (Crawford, 2020)
Q: What are the immediate effects of war on local economic activity?
A:
• Productivity shifts from manufacturing consumer goods to producing war supplies.
• Jobs are created during times of unemployment, but careers may be disrupted as individuals are drafted.
Q: How does war affect the stock markets and investor behavior?
A:
• War creates uncertainty, causing stock prices to fall as investors prefer safer options like gilts or cash deposits.
• Individual investors and those with investments in pension funds may see losses
Q: What are the financial impacts on providers and insurers during wartime?
A:
• Financial providers might develop new products with built-in guarantees to appeal to anxious consumers.
• Many insurers exclude compensation for damage to property caused by war or conflict
Q: How do weather patterns, climate change, and natural disasters affect financial markets?
A:
• Global warming significantly impacts industries like agriculture, leading to higher consumer prices.
• Rising temperatures and bad weather disrupt food production, increasing food costs
Q: What is the connection between weather, food prices, and personal finances?
A:
• Bad weather raises the price of commodities like grain, affecting bread and other food products.
• Families must allocate more of their budgets to food, as seen during price increases in 2008 and 2010-2011 due to poor weather conditions.
How does climate change affect the insurance industry?
A: The insurance industry is affected by more frequent and larger claims from extreme weather events, such as floods, storms, hurricanes, and forest fires, leading to increased premiums
Q: Why are UK house insurance premiums likely to increase?
A: They are increasing due to serious floods in 2014, which damaged thousands of properties in Wales and southern counties of England, especially in floodplain areas like the Somerset Levels
Q: What challenges do people with flood-damaged properties face?
A: Insurance companies may refuse to insure these properties or charge unaffordable premiums, significantly affecting homeowners’ financial stability
How can weather damage affect property value and wealth?
A: Weather damage, flooding, or subsidence can drastically reduce property value and lower the net wealth of property owners
What are subsidence and coastal erosion, and how do they impact properties?
A: Subsidence refers to the sinking of land, while coastal erosion involves the loss of land near coasts. Both reduce property value, making some properties uninsurable or unsuitable for mortgages
How do insurers address the risks posed by climate change?
A: Insurers spend heavily on research to identify riskier areas, adjust underwriting, and set premiums based on increasing weather damage and climate change
What economic impact did the 2010 Haiti earthquake have?
A: It caused massive loss of life and extensive economic disruption, destroying homes, businesses, and infrastructure. Haiti required significant foreign aid to recover
Q: Why might properties on crumbling cliffs lose value?
A: Their precarious position makes them unsellable, uninsurable, and ineligible for mortgages, despite having scenic views
What long-term adjustments are insurers making due to climate change?
A: They focus on analyzing climate-related risks to refine their underwriting policies and ensure future sustainability in the face of increased claims.
How did the volcanic eruption in Iceland in April 2010 cause global disruption?
A: The eruption created dust clouds that risked aeroplane engines, leading to UK air traffic being cancelled. This caused confusion over who should compensate travelers for disrupted holidays and additional expenses
How does the globalised nature of the insurance industry affect the UK?
A: Natural disasters abroad, such as hurricanes and tornadoes in the U.S., can lead to significant costs for UK insurance companies due to claims for household damages
What are some causes of business collapses in recent years?
A: Business collapses often stem from false accounting, poor operational controls, or deliberate unethical and illegal practices
What examples from the 2008 financial crisis illustrate unethical practices?
A: Companies like Lehman Brothers and AIG collapsed due to risky loans given to individuals unable to repay, and loans were improperly removed from balance sheets to misrepresent financial health
Why are business values and lending practices scrutinised after financial crises?
A: Questions arise about risky loans, the accuracy of balance sheets, and the ethicality of removing liabilities to appear more financially stable
What happens to the value of shares in a problem-hit company?
A: The value drops sharply, causing:
• Sudden loss of wealth for investors, including institutions and pension funds.
• Stock market uncertainty, as investors withdraw money over fears of broader issues.
• A fall in confidence in banks, accountants, and businesses, leading to reduced investment.
• Calls for stricter controls on companies to prevent future collapses and restore confidence
What regulatory changes have occurred due to financial problems?
A:
• Tightening of financial regulation under the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and the Bank of England (with increased powers under the Banking Act 2009).
• Banks are required to hold more capital (cash) to cushion against financial problems and protect customer interests.
• Stricter risk assessments and control practices
What is the role of a company’s compliance department?
A: Ensuring the company acts fairly, ethically, and in line with laws and regulations under the supervision of directors and auditors
What actions are being taken to address financial misconduct?
A:
• Increased focus on ethical conduct by directors and auditors.
• Strengthened financial regulations to protect stakeholders and prevent future issues
What is the main duty of auditors?
A: Auditors must check the accuracy of published accounts to protect shareholders and stakeholders. They ensure that accounts are reliable and can face lawsuits for failing to identify problems with accounts
Why can auditors be sued?
A: Auditors can be sued because people trust the accuracy of the accounts they audit. If they fail to detect errors or fraud, they may have to compensate stakeholders who lose money
How has the European Union influenced accounting standards?
A: The European Commission implemented International Financial Reporting Standards (IFRS) and a single set of auditing standards to ensure consistent rules for investors in EU companies
Why is trust in financial products critical for consumers?
A: If consumers doubt the safety of investing in shares or collective investments, they are less likely to buy these products, impacting financial markets and providers
What role do institutional investors play in regulatory improvements?
A: Institutional investors support improved regulations to increase consumer confidence in financial products, ensuring the stability of investments like pensions and unit trusts
How can political changes impact financial services?
A: Changes in leadership affect financial services by altering regulations, taxation, and consumer protections, depending on whether the government is more consumer-focused or business-friendly
How do consumer-focused governments regulate financial services?
A: These governments increase regulations to protect consumers, often criticizing and tightly controlling the financial industry for public reassurance
How do business-friendly governments regulate financial services?
A: They relax regulations and reduce taxes for financial providers, making financial products cheaper and more accessible for consumers.
Why do some governments encourage financial activity among the general population?
A: Governments encourage financial activity, such as setting up private pensions, to reduce pressure on state pension funding
What is an example of government intervention in pensions?
A: The government has capped charges on stakeholder pensions at 1%, making them low-cost for people on low incomes but reducing profitability for providers
What is the European Union (EU) expansion?
A: The EU began in 1958 as the European Economic Community (EEC) with 6 member states and has expanded to include 27 states as of today
How does government pension policy affect financial service providers?
A: Policies like capping stakeholder pension charges make it harder for providers to market these products profitably
Why is the expansion of the EU significant for financial markets?
A: It creates a larger, unified economic area with consistent regulations, fostering trade and investment
How did the strong euro during the global economic downturn affect eurozone countries?
A: The strong euro made goods and services less competitive compared to those outside the euro area, resulting in lower export earnings and higher import costs
What opportunities arise for new EU member countries joining the union?
A: They become part of a single market for financial products and services, enabling providers to compete across member states and offer products in other EU markets
What opportunities arise for new EU member countries joining the union?
A: They become part of a single market for financial products and services, enabling providers to compete across member states and offer products in other EU markets
How does increased competition benefit individuals in the EU market?
A: It provides greater choice and ensures that individuals are more likely to find financial products and services that meet their needs at the best price
What is the impact of new EU members adopting EU rules and regulations on UK investors?
A: UK investors gain confidence to invest in new EU markets and companies, creating new investment opportunities
How does EU expansion affect employment mobility within the union?
A: People from new member countries can more easily move to other EU countries for work, impacting employment figures and creating opportunities for businesses.
What are the benefits of increased labor mobility for financial providers?
A:
1. Recruitment: Financial providers in established EU countries can hire employees from new member states who may help sell products abroad.
2. Product Development: Providers may develop products tailored to immigrants’ needs
What is a pandemic?
A: A pandemic is when an infectious disease spreads rapidly to many people across a large region. An example is Covid-19, a respiratory illness causing mild to severe symptoms
What measures did governments introduce during the Covid-19 pandemic to slow the spread?
A: Governments introduced social distancing rules to keep people apart, imposed lockdowns, and mandated mask-wearing
What are lockdowns, and how were they implemented in the UK?
A: Lockdowns restricted people’s movements, requiring them to stay home unless for essential reasons. In the UK, lockdowns were implemented at different levels or “tiers” based on infection rates in specific areas
What were the economic effects of business closures during Covid-19 lockdowns?
A: Businesses closed temporarily, supported by the UK government’s furlough scheme. However, some could not survive, leading to redundancies and permanent closures
What financial assistance did the UK government provide to businesses during the pandemic?
A: The government introduced grants of up to £18,000 per firm in the March 2021 Budget to help high street and hospitality businesses reopen.
How did consumer spending habits change during the pandemic?
A: People spent less due to job insecurity, focusing more on essentials. This led to reduced spending, impacting businesses
What happened to Debenhams during the Covid-19 pandemic?
A: Debenhams, a 240-year-old department store chain, announced the closure of all its shops, leading to 12,000 job losses
How did the UK government deficit change during the pandemic?
A: Government borrowing soared to cover medical costs and business support, with borrowing in the 2020/21 financial year reaching a record high outside wartime
What long-term financial measures did the UK government take in response to the pandemic?
A: In the 2021 Budget, income tax bands were frozen until 2026 to increase higher-rate taxpayers and help reduce borrowing
What impact did the pandemic have on the UK economy?
A: The UK economy shrank, reducing GDP. Businesses and people faced devastating financial effects, with long-term impacts uncertain
What is social change, and how does it affect businesses?
A: Social change refers to changes in society that impact product providers and consumers. Businesses must adapt to these changes, such as evolving attitudes, diversity, and complexity in services.
How are attitudes toward money and financial provision changing?
A: Consumers are now more aware of the need to find the best products and services due to issues like the mis-selling of Payment Protection Insurance (PPI) and distrust of financial providers. This has led providers to adapt their product ranges, delivery methods, and business models to meet the demands of a more informed customer base
Why are price comparison websites becoming increasingly popular?
A: Consumers demand more information about the products they buy and seek to compare various options to make informed decisions, driving the popularity of price comparison websites
How do global organizations promote cross-cultural understanding?
A: Large organizations often move senior employees internationally, such as a New Yorker heading a UK bank. This global exchange of ideas helps refine what businesses offer and how they operate
What does “increasing complexity” in financial services mean?
A: Financial products are no longer single-purpose; they combine various features. For example, offset mortgages link savings accounts or current accounts with home loan benefits. However, this complexity can confuse some consumers
What is the “financialisation” of society, and how does it affect consumers?
A: Financialisation refers to the increasing integration of finance into everyday life. Consumers hold homes as investments, monitor stock market trends, and constantly search for better deals on insurance, utilities, and other financial products
How is the UK’s ageing population creating opportunities for businesses?
A: The ageing population provides opportunities for businesses offering products and services for older people, such as Saga, which specializes in financial products for the over-50s.
What challenges does the ageing population pose to the UK economy?
A: It places an increasing burden on the working population, which must fund pensions, medical services, and residential care through taxes, as there are proportionally fewer working-age individuals than retirees.
How did the economic structure in the 1950s and 60s differ from today regarding retirees?
A: During the 1950s and 60s, income tax and National Insurance contributions from workers were sufficient to cover the costs of pensions and welfare for a smaller retired population
What does the projected age structure of the UK population indicate?
A: The population is expected to have a growing proportion of older age groups (e.g., 70-74, 80-84) by 2028 and 2038, indicating increased demand for elderly care and associated services
How do organizations cater to special interest groups?
A: Companies like NFU Mutual focus on meeting specific needs, such as insuring farmers and, later, businesses outside farming, showcasing a specialist approach to serving a niche customer base
How have attitudes toward debt changed over time?
A: Previously, people avoided buying unless they had saved enough money. In recent decades, attitudes became more relaxed, with credit being widely used to purchase goods and services
What is the current trend regarding attitudes toward debt?
A: Attitudes toward debt are changing again, likely influenced by economic conditions and a reassessment of financial priorities
What major events have contributed to a cautious economic attitude in recent years?
A:
1. Financial crisis.
2. Credit crunch.
3. Economic recession.
4. Uncertainty caused by the Covid-19 pandemic
What is meant by ‘ethical considerations’ in business?
A:
Ethical considerations refer to how people within a particular culture believe things should be done, focusing on fairness, morality, and adherence to societal norms
What is one ethical concern related to offshoring?
A:
Offshoring may exploit workers in developing countries by:
• Paying ‘poverty’ wages.
• Subjecting them to unsafe working conditions that would be illegal in the UK
How do supporters of offshoring defend the practice?
A:
1. Wages are generally lower in developing countries due to a lower cost of living.
2. Workers in these countries often have better buying power despite low wages.
3. A low-paid job is considered better than having no job at all
What are examples of unethical business behavior regarding human rights?
A:
1. Paying unfair wages.
2. Providing poor working conditions
What are examples of broader ethical business considerations?
A:
1. Environmental ethics: Avoiding pollution and greenhouse gas emissions.
2. Product sustainability: Designing products that meet consumer needs without excessive resource use.
3. Political ethics: Avoiding partnerships with undemocratic regimes or corrupt industries.
4. Animal welfare: Avoiding practices like animal testing and factory farming
What does the Fair Trade movement aim to achieve?
A:
1. Ensure producers in developing countries are paid sustainable wages.
2. Provide working conditions that are safe.
3. Enable workers to support themselves and their families
What are examples of unethical practices related to political ethics?
A:
1. Supporting undemocratic regimes.
2. Promoting industries with poor human rights records (e.g., alcohol or tobacco).
3. Engaging in bribery or corruption to increase sales
What is product sustainability, and why is it important?
A:
Definition: Designing products to meet long-term consumer needs while minimizing resource use.
Importance: Helps conserve non-renewable energy, raw materials, and other natural resources
What are ethical investment decisions?
A:
Ethical investment decisions focus on avoiding investments in companies, sectors, or industries that conflict with an investor’s values, such as supporting human rights violations, animal welfare abuses, or unsustainable environmental practices
What controversy arose around Comic Relief’s investments in 2013?
A:
Comic Relief used funds raised for victims of war, alcohol addiction, and smoking-related illnesses to buy shares in companies producing:
• Armaments.
• Alcohol.
• Tobacco products.
These investments were criticized as unethical, leading Comic Relief to sell the shares and apologize
Why is it challenging for investors to ensure ethical investments?
A:
It is difficult to monitor all activities of companies in which they invest. However, tools like the FTSE4Good Index Series and organizations like UKSIF help investors assess ethical practices
What is the FTSE4Good Index Series?
A:
A tool designed to measure the performance of companies demonstrating strong environmental, social, and governance (ESG) practices
What is UKSIF?
A:
The UK Sustainable Investment and Finance Association (UKSIF) is a membership organization promoting sustainable and responsible finance in the UK.
What is the vision and mission of UKSIF?
A:
Vision: A fair, inclusive, and sustainable financial system benefiting society and the environment.
Mission: To support members in transitioning to sustainable finance and advancing sustainability in strategies and decision-making
What types of organizations are part of UKSIF?
A:
• Major banks (e.g., Barclays, HSBC).
• Insurance and investment companies.
• Pension fund managers.
• Financial advisers.
• Charities and church groups.
The London Institute of Banking & Finance is also a member
What is Good Money Week, and who hosts it?
A:
Good Money Week: An initiative hosted by UKSIF since 2008 to bring together:
• Financial advisers.
• Charities.
• Faith and community groups.
• Financial institutions.
Its aim is to raise awareness of sustainable and ethical investment practices
What resources does UKSIF provide to investors?
A:
• Guidance for students, advisers, charities, and churches.
• Information on ethical investing strategies
What is Ethical Investors?
A:
Ethical Investors is a UK-based pioneer in providing financial advice on ethical, socially responsible, and environmental investments.
Key Focus:
1. Developing the ethical investment market.
2. Ensuring financial products (e.g., ethical pensions, ISAs, and mortgages) meet financial and ethical client needs
What is Ethical Consumer, and what does it provide?
A:
Ethical Consumer is an online magazine offering:
• Detailed ethical reviews.
• Ethical “best buys” for financial products in its “Money” section.
Products Reviewed:
• Savings accounts, pensions, and mortgages.
• Car, home, and pet insurance.
• Investment funds.
What does a company with an active CSR policy demonstrate?
A:
1. Responsibility for its actions.
2. Positive impact on the environment.
3. Support for its consumers, employees, communities, and stakeholders
What stakeholders are included in the CSR policy model?
A:
1. Investors/Shareholders.
2. Customers.
3. Community.
4. Employees.
5. Environment.
6. Suppliers.
7. Government
What is the main purpose of a CSR (Corporate Social Responsibility) policy
A CSR policy links the public interest to corporate decision-making, focusing on:
1. Reducing the carbon footprint (e.g., recycled materials, video-conferencing, remote work).
2. Addressing general environmental issues (e.g., paperless offices, energy reduction via insulation and water recycling).
3. Making environmentally friendly purchasing decisions, like bulk ordering or sourcing from companies with sound environmental policies
What are the main environmental aspects of CSR policies
- Reducing waste through initiatives like paperless offices.
- Cutting energy consumption by implementing better insulation or water recycling.
- Purchasing eco-friendly materials and supporting suppliers with ethical environmental practices.
How does Lloyds Banking Group implement CSR policies
In 2014, Lloyds Banking Group launched the Helping Britain Prosper Plan to:
• Address social, economic, and environmental issues.
• Focus on environmental sustainability, affordable housing, financial savings, business support, digital skill-building, diversity, and tackling social disadvantage.
How does Barclays promote diversity and inclusion as part of its CSR policy
Barclays has a diversity and inclusion strategy ensuring equal treatment for all employees, structured around five pillars:
1. Gender
2. LGBT+
3. Disability
4. Multigenerational inclusion
5. Multicultural representation
What CSR activities does NatWest Group (formerly RBS Group) focus on
NatWest Group:
• Provides free and reduced-fee banking services for charities.
• Encourages employees to volunteer by allowing at least three working days annually for community volunteering.
What are the key CSR contributions of the Santander Foundation
- Donated over £21 million to small, local UK charities supporting disadvantaged individuals.
- Launched a new grants program in 2021 to deliver digital and financial education to groups excluded from financial services
What are the characteristics of ethically branded organizations and products
Ethically branded organizations:
• Avoid targeting unsuitable customers.
• Examples of unethical branding include marketing harmful products like alcohol specifically to vulnerable groups (e.g., teenagers)
What defines an ethically branded organization and financial product
• An ethically branded organization produces products aimed at appropriate customers who can afford them and for whom they are suitable.
• Customers should not be misled by attractive advertising into unsustainable financial commitments.
• Post-financial crisis, banks emphasize responsible lending, particularly avoiding unsustainable loans, which contributed to the economic downturn
What is the concept of “ethical operations” in the financial sector
Ethical operations refer to how financial institutions perform everyday activities responsibly, such as:
• Promoting paperless bank accounts to save trees and reduce waste.
• Encouraging customers to manage accounts online for efficient access to account details and statements, which are stored for several years for checking past transactions
How do banks use technology to enhance ethical operations
- Text Alerts: Notify customers when accounts are near overdraft, allowing immediate action to prevent unplanned overdraft use.
- Electronic Marketing: Deliver campaigns via SMS or email, embedding direct links to product details for better transparency and instant customer access to terms and conditions
What does sustainability in the financial services sector mean
• It involves building systems that support sustainable personal finances, benefiting economies, technology, and daily life.
• Sustainability must consider the long term, ensuring systems can be maintained and support future generations
What determines the long-term sustainability of financial institutions
• Institutions like banks, building societies, and insurance companies will survive long-term if they:
1. Operate sustainably and comply with rules and regulations.
2. Monitor employees’ actions and long-term risks carefully.
• Providers that fail to do so risk collapse, impacting individuals’ personal finances and the economy
How can individuals manage their finances sustainably
- Pay for necessities and desires without becoming over-indebted.
- Balance consumption with saving during working life to ensure comfort in old age.
- Use sustainable financial services/products to support long-term financial health
Providers/products lacking sustainability harm personal financial stability
Who are the consumers of financial services, and what do they expect
Consumers of financial services include:
• Savers, borrowers, users of payment systems, and purchasers of protection, investment, and pension products.
Expectations:
1. Access to a wide range of good-quality products at a fair price. 2. Fair and honest treatment from providers.
Sustainability in financial services is crucial for personal finance stability
What are the potential economic impacts of failing financial systems
- Millions of daily payments via bank accounts could stop, halting:
• Shoppers’ purchases, workers’ wages, firms’ material and rent payments.- Savers could lose deposits above state guarantees (e.g., FSCS in the UK).
- Borrowers face uncertainty over debt terms and new creditors.
- Insurers failing would leave individuals/companies exposed to uncovered risks and major financial losses.
Why is sustainability in financial services critical
Without sustainable financial services, individuals and businesses face:
• Increased uncertainty and risk.
• Potential economic instability caused by disruptions in financial systems
What do financial services providers, such as banks and investment funds, rely on?
A: They rely on trading in financial markets by borrowing and lending to each other, as well as buying and selling financial securities from and to each other
Why are financial markets considered highly interconnected and complex?
A: These markets form intricate networks on a global scale, where most transactions are conducted electronically within seconds, constantly changing the prices of shares, bonds, and currencies.
What is an example of international financial interdependence?
A: A British bank borrowing money for several months by selling bonds to a Chinese bank, which allows it to lend more to its customers
Why does interdependence in financial systems create systemic risk?
A: If a major player in the system fails, it creates a domino effect where other players are affected, potentially leading to the collapse of the entire system.
What could happen if a large international bank fails to pay its debts?
A: Banks to which it owes money may fail, as they would be unable to meet their obligations. This undermines confidence in the financial system, potentially causing a systemic failure
Why is confidence crucial in financial markets?
A: Financial systems depend on confidence. If confidence is undermined, the system becomes unsustainable and risks failure
What is systemic failure in financial systems compared to?
A: It is like collapsing dominoes: the failure of one institution can lead to a chain reaction, affecting other interconnected institutions.
What are the direct impacts of a systemic financial failure on customers of failed banks?
A: Customers would be unable to:
• Use the money in their accounts.
• Make debit card or cheque payments.
• Receive salaries or pensions directly into their accounts.
How does systemic failure affect the economy?
A: People would lose the ability to buy goods and services they need, disrupting the economy and individual livelihoods
What role does regulation play in preventing systemic financial failures?
A: Regulations are designed to prevent the interconnected operations of banks from causing widespread failure if one institution collapses
How would a systemic financial failure affect businesses?
A: Businesses would struggle to:
• Pay employees’ salaries.
• Buy raw materials.
• Borrow funds for cash flow and investments.
Many would cease trading, leading to job losses and severe economic consequences
What could happen to economic activity during a systemic financial failure?
A: Economic life would effectively halt, forcing transactions to be conducted in cash or, in extreme cases, barter
How would customers with savings accounts in failed banks be affected?
A: - Customers could lose their savings, including life savings relied upon for lifestyle or retirement.
• This would cause widespread social distress
What challenges would borrowers face if their bank failed?
A: - Borrowers would face uncertainty about their debts.
• Debts wouldn’t be written off but taken over by another company.
• Borrowers wouldn’t know the new repayment terms they might have to agree to.
What would happen to stock market prices in the event of systemic financial failure?
A: - Stock market prices would slump significantly.
• The pound sterling’s value would fall against other currencies if UK banks were primarily affected.
This would negatively impact interest rates, economic growth, inflation, and unemployment
Why are banks referred to as “too big to fail”?
A: The failure of one or more major banks would have consequences too severe for governments to allow. This is why governments inject cash into major banks during crises, as seen when the credit crunch and interbank lending froze
Extreme weather, especially flooding, has led to an increase in:
A. Car insurance prices
B. Home insurance prices
C. Pet insurance prices
D. Life assurance prices
B
Once a country has joined the euro it:
A. Follows the ECB’s fiscal policy
B. No longer sets its own interest rates
C. Closes down its central bank
D. No longer sets its own financial budget
A
Gross domestic product (GDP) measures a country’s economic activity by reference to its:
A. Total output of financial service products, usually measured at their market priced
B. Total output of goods and services, usually measured at their production costs
C. Total of imports and export, usually measured at their market prices
D. Total output of goods and services, usually measured at their prices
D
Who has a duty to check the accuracy of a company’s accounts?
A. The compliance manager
B. The auditors
C. The board of directors
D. The customers
B
In the event of a major failure of the system, the customers of the failed banks would be hit immediately.
True
False
True
An increase in the UK interest rates may lead to:
A. A fall in consumer spending
B. An increase in consumer spending
C. More demand for UK goods and services
D. A fall in demand for savings products
A
Improving levels of financial inclusion and literacy in the UK, particularly amongst vulnerable groups, is an example of:
A. Corporate social responsibility
B. Environmental Ethics
C. Product sustainability
D. Exploitive
A
The term ‘ethical operations’ refers to how the systems that we have set up, and with which we live and work, can be maintained into the future.
True
false
False
Outsourcing is:
A. The process of one provider paying another to carry out certain functions that it would normally do itself
B. The practice of moving some of a company’s operational functions to oversees locations
C. Bringing some of the functions that had been moved oversees back to the UK
D. Finding financial products not provided by the bank that you have your current account with
A
In times of economic uncertainty:
A. Lenders make it easier for businesses and individuals to take out loans and mortgages
B. Individuals tend to move their investments into gilts or cash
C. Governments tend to spend less on welfare benefits
D. Individuals tend to move their investments into stocks and shares
B
The relationship between sterling and interest rates mean that:
A. If interest rates rise, demand for sterling falls
B. If interest rates rise, demand with be erratic
C. If interest rates rise, demand for sterling is unaffected
D. If interest rates rise, demand for sterling rises
D
A fall in price of oil is:
A. Good for the UK’s finances
B. Bad for the UK’s finances
C. Has no real impact on the UK’s finances
D. Never going to happen
A
