Topic 8 - Consumer Protection

Question 1

What are the 4 organisations that provide consumer protection in the UK financial services market?

Answer 1

• regulators that set out rules; financial conduct authority (FCA), prudential regulation authority (PRA)
• financial ombudsman service
• financial services compensation scheme,
• the competition and market authority,

Question 2

What were causes of the credit crunch?(3)

Answer 2

• banks lending money to people whom were unlikely to pay
• banks used money for retail business to pay the losses made by their investment operations , thus did not have enough money for customers to withdraw or to repay depositors
• uk market was dominated by large banking organisations deemed too big to fail, thus would be disastrous if they did

Question 3

What are investment operations?

Answer 3

The section within a bank that buy stocks and shares and complex and risky investment products called derivatives

Question 4

When was the financial crisis?

Answer 4

2007/2008

Question 5

What was the financial crises impact on the housing market? (7 factors)

Answer 5

• lenders provided 100% mortgages to risky borrowers
• lenders then sold some of this debt to other providers
• banks then lost a lot of money when the lenders couldn’t pay mortgages
• interest rates rose increasing mortgages repayments
• house prices stalled, homeowners started to sell leasing to a fall in the marked
• market collapsed so price of house was worth less than the mortgage owed to the bank
• banks stopped lending money to other banks so banks made losses and couldn’t acccess cash

Question 6

What are the 3 main areas of consumer protections?

Answer 6

• financial policy committee within the bank
• PRA
• FCA

Question 7

What are the 5 key recommendations of the independent commission on banking - to resolve the credit crunch?

Answer 7

• improve regulations of providers
• made sure banks are able to absorb any losses
• make it easier and less costly to deal with banks in financial trouble
• reduce the amount of risk banks take
• desperate retail banking investment banking

Question 8

When did the government pass the first legislation to implement the recommendations of the independent commission on banking?

Answer 8

The government passed the first legislation to implement these recommendations in the financial services act on 19th December 2012

Question 9

What is regulation?

Answer 9

The process of supervising the actions and businesses of financial services providers.

Question 10

When was the new system of regulations established and then came into force?

Answer 10

Established financial services act 2012
- came into play on the 1st April 2013

Question 11

What does the FPC stand for?

Answer 11

Financial policy committee

Question 12

What is the FPC?

Answer 12

Formed in 2010 in anticipation of the regulatory changes that followed.
It monitors and responds to risks posed to the whole of the financial services market.
It looks at problems that could arise for the market as a whole.
The FPC is called a macro-prudential authority

Question 13

Who has the power to direct the BofE to take action If there is a serious threat to the financial stability of the market and public funds?

Answer 13

The Chancellor of the Exchequer and HM Treasury

Question 14

What does PRA stand for?

Answer 14

Prudential regulation authority

Question 15

What is the PRA?

Answer 15

Responsible for the prudential regulation of providers of financial services.
- part of the BofE
- board of PRA reports to parliament
- funded by fees paid by providers

Question 16

What is meant by the word prudence?

Answer 16

showing cautions! sound judgment, specifically in relation to risk forethought related to business matters

Question 17

What are the objectives of the PRA?

Answer 17

- promote the safety and soundness of providers
- helping providers to to cope better in a crisis and can support the economy
- the PRA is not tasked with making sure providers don’t fail but rather the economy and financial systems can cope if a provider does fail
- securing an appropriate degree of protection for insurance policy holders

Question 18

How does the PRA achieve its objectives?

Answer 18

Set standards and requirements that providers must meet.

Question 19

Why is the PRA forward looking?

Answer 19

So it can assess the level of risk on the future
- take action to make sure providers reduce risk
- Aldo to order providers to change their lending criteria

Question 20

What does FCA stand for?

Answer 20

Financial conduct authority

Question 21

What does conduct mean?

Answer 21

The way an organisation behaves on a given situation

Question 22

What does the FCA do?

Answer 22

Aim to prevent misconduct by the providers of financial services, preventing the sale of inappropriate products to consumers such as PPI and payday loans

Question 23

What are the objectives of the FCA? (3)

Answer 23

• Secure and appropriate degree of protection for customers
• protect and enhance the integration of the uk financial system
• promote effective competition in the interests of consumers

Question 24

What actions can the FCA take if providers have broken rules?

Answer 24

• impose fines on providers +/ individuals
• withdrawing or suspending a providers authorisation to operate
• ordering providers to compensate customers

Question 25

What does FOS stand for?

Answer 25

Financial Ombudsman Service

Question 26

What is the FOS?

Answer 26

The FOS was set up to resolve Individual complaints from customers
- customers with complaints go to the FOS, for free
- the FOS consider both sides of every complaint
- the FOS can order the provider to pay compensation to the customer up to a specified maximum which depends on when the case was brought to the FOS

Question 27

What do the FSCS do?(3)

Answer 27

• Funded by levies on regulated providers
• repays customers their deposits held by providers regulated by the FCA
• deposits are covered to the value of £85k pp per provider

Question 28

What does CMA stand for?

Answer 28

Competition and market authority

Question 29

What is the CMA responsible for?(5)

Answer 29

• investigating mergers that could restrict competition
• conduction of market studies and investigation ins whole markets where there may be competition and consumer problems
• bringing criminal proceedings against businesses and individuals who take part in cartels
• enforcing consumer protection legislation to tackle practiced and market conditions that make it difficult for consumers to exercise choice
• co operating with the government and sector regulations and encouraging them to use their competitive powers

Question 30

What are voluntary codes of conducts?

Answer 30

Voluntary codes of conduct include financial providers setting up voluntary rules that they adhere to

Question 31

What is the role of the financial ombudsman service?

Answer 31

To handle customer complaints about providers

Question 32

How much will the FSCS protect consumers of private faults for?

Answer 32

£85k

Question 33

What is the aim of the competition and market authority?

Answer 33

To make the financial market work for consumers, businesses and the economy

Question 34

What standards does the PRA set?

Answer 34

providers must:
- hold enough cash for day to day transactions and capital/funds to absorb a certain level of losses
- have a suitable management
- be fit and proper
- conduct business prudently