Topic 7 Flashcards
What forms have the changes in the financial system taken?
• New organizations have been established.
• Institutional roles and responsibilities have been redefined.
• Legislation and regulation introduced in the EU and UK.
• Increased consumer protection measures implemented.
• Industry guidelines updated
What benefits have these changes brought to consumers?
• Greater protection and safety in financial systems.
• Increased transparency of operations and financial information.
• More competitive fees for services and products
What are some key impacts of recent financial changes?
• Low interest rates affecting savings and investments.
• Changes in eligibility criteria for financial products and services.
• Changes in the state pension age.
• Modifications to the benefits system, requiring consumers to adapt financial plans for long-term sustainability
What is the state pension age for men and women based on their birth year in the UK
Birth year 1950 Men: 65 / Women: 60
Birth year 1960 66
Birth year 1970 67
Birth yeah 1980 onward 68
How has increased access to technology influenced financial services? And What do these tools offer consumers?
• Financial information and services are now widely available online or via mobile apps.
• Development of tools like budget apps, text services, and advice websites
• Easier ways to manage money.
• Free, unbiased, and reliable financial advice
Name examples of new financial providers, products, and services. And Why should consumers consider these options?
• Providers: Metro Bank.
• Products: Individual Savings Accounts (ISAs), basic bank accounts.
• Services: Current Account Switch Service
• To better plan, choose, and operate their financial products
What is personal financial sustainability affected by?
A: It is affected by the sustainability of the economy in which an individual lives
Which key economic factors influence personal financial sustainability?
A: Interest rates, inflation, house prices, and unemployment rates
How did the government influence economic factors before 1997?
A: By setting monetary policy implemented by the Bank of England
What significant change occurred in 1997 regarding the Bank of England?
A: It was made independent of the government and tasked with setting monetary policy to ensure monetary stability
What did the Bank of England Act 1998 formalize?
It gave the Bank of England responsibility for setting the Bank rate
What was the intention behind giving the Bank of England control over the Bank rate?
A: To use the Bank rate as a tool to meet a Consumer Prices Index (CPI) inflation target of 2%
What is the ultimate goal of setting monetary policy?
A: To deliver stable prices and help create a stable, sustainable economy
How did the Bank of England respond to the 2008 financial crisis?
A: The Monetary Policy Committee (MPC) reduced the Bank rate to 0.5% in March 2009 to stimulate the economy
What further change occurred to the Bank rate in August 2016?
A: It was lowered to 0.25% following the Brexit referendum
What happened to the Bank rate in March 2020 during the COVID-19 pandemic?
A: It was reduced to an historic low of 0.1%
Why was the Bank rate reduced to 0.1% in 2020?
A: In response to the economic instability created by COVID-19
What are the effects of an extremely low Bank rate on savings and borrowing products?
A: It leads to low returns on savings products and low charges on borrowing products
How do savers and borrowers view a low Bank rate differently?
A: Savers wish for an increase in the Bank rate to gain higher returns, while borrowers hope it remains low to keep borrowing costs down
Why is predicting when the Bank rate will increase difficult?
A: Economic conditions and future monetary policy decisions are unpredictable
What are the long-term concerns for individuals regarding a low Bank rate?
A: People are uncertain whether their financial plans are sustainable in the long term. Savings may offer greater returns in the future, and borrowing costs are likely to rise, but the timing is unclear
What announcement did Mark Carney, the governor of the Bank of England, make in August 2013? And Why was this announcement significant?
A: He stated that an increase in the Bank rate would only be considered if the UK unemployment rate fell to 7% or below
It addressed uncertainty and provided a clear economic indicator for a potential increase in the Bank rate.
What are the key factors affecting home affordability?
A:
1. Private rental prices: Moderate increase.
• Evidence: Increased by 1.7% in the 12 months to November 2021 (UK).
2. Average earnings compared to property price: Slight increase.
• Evidence: In 2020, property prices grew faster than earnings in England.
3. Regional differences: Greater affordability challenges in England than Wales.
• Evidence: In 2020, full-time employees in England spent 7.8 times their annual earnings on buying a home, compared to 5.9 times in Wales.
How do low interest rates affect older adults?
A:
• Low interest rates reduce income from savings, making it harder to sustain living expenses.
What is the purpose of a sustainable financial services industry?
A:
• To ensure individuals can sustain personal finances long-term.
• Goals include:
1. Making financial services safer for consumers.
2. Increasing choices in products, services, and providers.
3. Avoiding market failure.
Why is the sustainability of individual finances important?
A:
• Ensures people can manage financial challenges (e.g., low interest rates, rising housing costs).
• Reduces reliance on external support (e.g., family or government).
• Promotes long-term economic stability.
What role do regulatory changes play in sustainable financial services?
A:
• New regulatory regimes aim to:
1. Protect consumers.
2. Enhance transparency in financial markets.
3. Improve trust in financial institutions.
• These changes directly contribute to financial stability and sustainability.
What is the aim of the European Union’s financial services policy?
A:
• To deliver stable, secure, and efficient financial markets.
• Achieved through the European System of Financial Supervision (ESFS)
What are the key components of the European System of Financial Supervision (ESFS)?
A:
1. European Systemic Risk Board (ESRB):
• Monitors the financial sector to identify potential problems that could lead to crises.
• Takes preventative action (2022).
2. Three independent regulatory bodies (established on January 1, 2011):
• European Banking Authority (EBA): Ensures consistent prudential regulation and supervision across the banking sector.
• European Securities and Markets Authority (ESMA):
• Safeguards financial stability in the EU.
• Protects investors and promotes orderly financial markets.
• European Insurance and Occupational Pensions Authority (EIOPA):
• Focuses on short-, medium-, and long-term stability and effectiveness of the financial system.
• Supervises insurance and pensions sectors.
What is the role of the European Systemic Risk Board (ESRB)?
A:
• Monitors the entire financial sector for risks that could cause future crises.
• Takes preventative action to maintain financial stability (2022).
What was Michel Barnier’s explanation of the EU regulatory framework’s aim?
A:
• To coordinate national financial authorities and harmonize technical rules for the financial services sector.
• Member countries are only obliged to implement changes presented as EU directives or regulations.
What is the EU Directive 94/19/EC on Deposit Guarantee Schemes?
A:
• Requires EU countries to offer compensation schemes protecting depositors if an institution fails.
• Sets a minimum compensation of €20,000 per person per institution.
How was the Deposit Guarantee Scheme implemented in the UK?
A:
1. Credit Institutions (Protection of Depositors) Regulations 1995:
• Set maximum compensation at £2,000 and 90% of deposits between £2,000 and £35,000.
2. Financial Services Compensation Scheme (FSCS) (2001):
• Replaced earlier schemes to protect depositors.
3. 2009 Update:
• Raised compensation limit to €50,000 and then to €100,000 (approx. £85,000).
What is the European Banking Authority (EBA), and what does it do?
A:
• Established in 2011.
• Works to ensure effective and consistent regulation and supervision of the EU banking sector.
What are the responsibilities of the European Securities and Markets Authority (ESMA)?
A:
• Safeguards financial stability within the EU.
• Protects investors and promotes orderly and stable financial markets.
What are the objectives of the European Insurance and Occupational Pensions Authority (EIOPA)?
A:
• Ensures the short-, medium-, and long-term stability of the EU financial system.
• Provides a consistent regulatory framework for insurance and pensions sectors.
What is Directive 2004/113/EC (EU Gender Directive) and how has it been applied in the UK?
A:
• Establishes equal treatment between men and women in access to goods and services.
• European court judgment prohibits insurers from charging different premiums based on gender.
• In the UK, it led to an amendment in the Equality Act 2010, meaning:
• Young female drivers now pay more for insurance.
• Young male drivers pay less.
• Requires men and women to receive the same annuity rates for pensions, addressing past disparities where women received lower yearly incomes due to longer life expectancy.
What is Directive 2004/109/EC (Transparency Directive), and how has it been implemented in the UK?
A:
• Implemented in the UK in January 2007 via changes to the Financial Services and Markets Act 2000.
• Covers the storage and provision of regulated financial information, including:
• Financial reports of providers.
• Annual and half-yearly accounts.
• Interim management statements.
• Disclosure of major shareholder transactions.
• Purpose:
• Makes it harder for providers to hide balance sheet deficits.
• Reduces the risk of bank failure.
What changes to motor insurance premiums have resulted from the EU Gender Directive?
A:
• Gender can no longer be used to calculate premiums:
• Young female drivers face higher costs as they were previously charged less.
• Young male drivers benefit from lower costs as they were previously charged more due to a higher likelihood of accidents.
What are the key implications of the Transparency Directive for financial services providers?
A:
• Providers must publish detailed and accurate financial reports.
• Transparency reduces the likelihood of hidden deficits in financial statements.
• Increases confidence in the stability of financial markets and reduces systemic risks like bank failures.
How does the EU Gender Directive affect pension annuity rates?
A:
• Men and women must now be offered equal annuity rates.
• Addresses past discrimination where women received lower annual incomes due to longer life expectancy.
What is Directive 2013/36/EU, and why is it significant?
Back: Directive 2013/36/EU, known as the Capital Requirements Directive (CRD) IV, is an amendment to an earlier version of the directive. It specifies the liquid assets that financial providers must hold to meet customers’ withdrawal needs during times of external funding unavailability. This reduces the likelihood of a “run on the bank” and minimizes the chance that taxpayer money will be needed to bail out banks.
How does CRD IV reduce the risk of bank failures?
Back: CRD IV ensures banks hold sufficient liquid assets to meet customer withdrawal demands during periods without external funding. This prevents panic-driven withdrawals (“run on the bank”) and decreases the reliance on taxpayer-funded bailouts.
What provisions does the Financial Conduct Authority (FCA) Remuneration Code introduce under CRD IV?
Back:
1. 50% of bonuses for senior managers, risk takers, and control staff must be paid as shares.
2. A portion of the bonuses must be deferred, ensuring payouts are based on actions contributing to the bank’s long-term sustainability.
What is the purpose of the 2:1 cap on bonuses introduced by CRD IV?
Back: The 2:1 bonus cap limits bankers’ bonuses to 100% of their base salary, or up to 200% with shareholder approval. This measure reduces excessive risk-taking by capping potential earnings from profits.
How does CRD IV link personal financial sustainability to regulatory actions?
Back: CRD IV highlights how directives, regulations, and EU court rulings influence financial sustainability. For example, a 2009 ruling split Lloyds TSB into two banks, increasing competition and consumer choice in the UK banking sector.
What is the purpose of recent legislation in the UK financial services industry?
Back: Recent legislation in the UK ensures the sustainability of the financial services industry and impacts personal financial sustainability. These changes aim to promote fair, clear, and non-misleading practices by financial providers.
What is the Banking Conduct of Business Sourcebook (BCOBS), and when was it introduced?
Back: The Banking Conduct of Business Sourcebook (BCOBS) was introduced on 1 November 2009 by the Financial Services Authority (FSA). It requires banks to communicate fairly, clearly, and without misleading consumers, addressing information failure. It is now operated by the Financial Conduct Authority (FCA).
What is the Banking Conduct of Business Sourcebook (BCOBS), and when was it introduced?
Back: The Banking Conduct of Business Sourcebook (BCOBS) was introduced on 1 November 2009 by the Financial Services Authority (FSA). It requires banks to communicate fairly, clearly, and without misleading consumers, addressing information failure. It is now operated by the Financial Conduct Authority (FCA).
What does the FCA’s Senior Managers Regime, Certification Regime, and Conduct Rules ensure?
Back: These frameworks ensure that senior bankers and certain staff providing regulated financial advice are ‘fit and proper’ by assessing their:
1. Honesty, integrity, and reputation.
2. Competence and capability.
3. Financial soundness.
Certain staff must be approved before performing their roles.
How has the FCA replaced the former Approved Persons Regime?
Back: The FCA replaced the former Approved Persons Regime with the Senior Managers Regime, Certification Regime, and Conduct Rules. These ensure higher standards for individuals in key financial roles.
What is the purpose of the Credit Act 2006?
Back:
• It increased the powers of the Office of Fair Trading (OFT) to investigate consumer credit license applicants, impose conditions, and charge penalties up to £50,000 for non-compliance.
• Ensures lenders’ products meet standards that protect borrowers’ interests.
Note: The FCA took over OFT’s consumer credit responsibilities in April 2014.
What are the key provisions of the Financial Services and Markets Act 2000?
Back:
• Introduced the Financial Ombudsman Service.
• Established the Financial Services Authority (FSA) as the regulator and defined the regulatory framework.
Note: The FSA was replaced under the Financial Services Act 2012.
What does the Banking Act 2009 aim to achieve?
Back:
• Allows the Bank of England to close a bank before insolvency to protect the wider financial services industry.
• Provides the Bank of England with a statutory financial stability objective.
