Topic 8 Consumer Protection Flashcards
2004 - Credit crunch
- USA interest rates were low at 1%
- US banks lent mortgages to people with poor or no credit histories
- banks that provided these mortgages sold the mortgages on to other banks and organisations around the world as investments
Sub-prime mortgages
Giving mortgages to people with poor or no credit histories. These customers are high risk because they’re less likely to repay loans.
Nicknamed ‘Ninja loans’ because the customer had No Income, No Job or Assets
2006- credit crunch
- USA interest rates rose to 5.35% and many sub-prime customers could not make their mortgage repayments
- Banks tried to sell the homes that the mortgages were secured on, but lots were sold so house prices dropped significantly
- Banks lost a lot of money as well as organisations that had bought investment products based on the sub-prime mortgages
- Lots of banks were affected so lending between banks was reduced
2007 - credit crunch
- UK bank Northern Rock couldn’t borrow money it needed so turned to Bank of England for help
- BoE gave NR emergency financial support which was reported by the media
- Customers tried to withdraw all their deposits (bank run)
- September 17 - the government announced that it would guarantee all deposits in NR
2008 - credit crunch
- On February 2008 the government announced that NR would be nationalised
- largest USA investment bank, Lehman Brothers, became bankrupt on 15 September
- this caused providers around the world to lose money ans stock market prices to fall
- 13 October - government announced it was bailing out the large banking groups (Halifax/Bank of Scotland, Lloyds and the Royal Bank of Scotland) by buying shares
What were the key recommendations of the Independent Commission on Banking after the credit crunch?
- improve regulation of providers
- make sure banks are able to absorb losses
- make it easier and less costly to deal with banks in financial trouble
- reduce the amount of risk banks take
- separate retail banking from investment banking (ring-fencing)
What is regulation?
The process of supervising the actions and businesses of financial service providers
It promotes consumer confidence and protects people from dishonest, incompetent or financially unstable providers.
Financial Policy Committee
- part of the Bank of England
- monitors and responds to risks posed to the whole of the financial services market
- macro-prudential authority
The Chancellor of the Exchequer in the Treasury has what powers?
Powers to direct the BoE to take action if there is a serious threat to the financial stability of the market and public funds are at risk
Which two regulators (that replaced the Financial Services Authority) work together?
- The Prudential Regulation Authority and the Financial Conduct Authority
- PRA is part of BoE
- FCA is an independent organisation
- PRA is responsible for micro-prudential regulation - involves looking at the risk that individual providers might present to the stability of the financial services market
- FCA is responsible for ensuring that all providers conduct their businesses in a way that benefits consumers and the market as a whole
The work of the regulatory system is supported by the:
How do they receive funding?
- Financial Ombudsman Service - to handle customer complains
- Financial Services Compensation Scheme - to compensate consumers if their financial services provider fails and so rebuild trust in the industry
- Money Advice Service - a consumer information service set up by the government to help peoppe make informed financial decisions
They receive funding from providers via levies (fees that must be paid)
What are the PRA’s two objectives?
- promoting the safety and soundness of providers
- securing an appropriate degree of protection for insurance policyholders
What are the PRA’s threshold conditions for businesses?
- holding enough cash and having enough capital to absorb a certain level of losses
- having suitable management
- being fit and proper
- conducting business prudently, that is, managing risk well to ensure the business is safe and sound
Who does the FCA report to?
The Treasury
What are the FCA’s three operation objectives?
- to secure an appropriate degree of protection for consumers
- to protect and enhance the integrity of the UK financial system
- to promote effective competition in the interests of consumers
