Unit 1 Topic 8

Question 1

Define ‘capital’

Answer 1

The money or other assets owned by an individual or a business. Refers to the funds provided by the shareholders, not deposits from customers.

Question 2

Who are Citizens Advice?

Answer 2

A charity providing free, independent, confidential and impartial advice on citizen’s and consumer’s rights and responsibilities.

Question 3

Who are the CMA?

Answer 3

Competition and Markets Authority
An independent, non-ministerial government department which works to promote competition between providers so that consumers benefit.

Question 4

What is a credit crunch? Why did the global financial crisis of 07/08 start?

Answer 4

A reduction in the availability of loans or a tightening of the conditions needed to obtain one. The global financial crisis of 2007-08 began when financial institutions became reluctant to lend funds to one another.

Question 5

What is a deposit?

Answer 5

A sum of money placed by a customer with a financial services provider.

Question 6

What is the FOS?

Answer 6

Financial ombudsman service
An independent body set up by parliament that settles customer complaints about providers at no charge to consumers.

Question 7

Who are the FPC? What kind of authority are they?

Answer 7

Financial Policy Committee
A part of the Bank of England that monitors and responds to risk posed to the entire financial services market. Its focus on the whole market makes it a macro-prudential authority.

Question 8

Who are the ICB?

Answer 8

Independent Commission on Banking
A committee formed in June 2010, as a response to the global financial crisis. It considered reforms to the UK banking sector to promote both financial stability and competition.

Question 9

Who is an IFA?

Answer 9

Independent financial adviser
A professional who makes financial recommendations to clients, based on available products across a wide range or providers.

Question 10

What are investment banks?

Answer 10

Banks that are involved in trading financial assets such as shares, underwriting issues of shares by other institutions and advising on mergers and acquisitions. Investment banks don’t provide services such as current accounts.

Question 11

Define ‘liquidity’

Answer 11

The assets that a business holds in the form of cash, that can be used to meet immediate demands for payment.

Question 12

What is MoneyHelper?

Answer 12

An independent organisation set up by the government to support people to make the most of their money and pensions.

Question 13

What is money laundering?

Answer 13

The process of making ‘dirty’ money (money gained from criminal activities) ‘clean’ - in other words making it look like it has been acquired legitimately.

Question 14

What is PPI?

Answer 14

Payment Protection Insurance
An insurance product intended to ensure repayment of loans should a borrower face unexpected events that prevent them from repaying the debt.

Question 15

What is a PIN?

Answer 15

A secret personal identification number that verified a user’s identity to a system.

Question 16

What are retail banks? What do they provide?

Answer 16

Banks that deal directly with consumers, for example providing current accounts and mortgages.

Question 17

Explain ‘Standards of Lending Practice’

Answer 17

A voluntary code of conduct that sets out good practice for the provision of advice about loans, credit cards, charge cards and current account overdrafts. It assures customers that subscribed providers follow the Standards and gives information on the service they should expect.

Question 18

Define ‘Sub-prime market’

Answer 18

Lending to and borrowing by consumers with untested or poor credit histories.

Question 19

Name 2 causes of the credit crunch

Answer 19

Banks lent to people that were unable to pay
UK market was dominated by a bank organisation ‘too big to fail’

Question 20

Name 3 key recommendations of the Independent Commission on banking

Answer 20

Improve regulation of providers

Separate retail banking +
investment banking

Reduce the amount of risks banks take

Question 21

What was the legislation that was introduced to implement these recommendations?

Answer 21

The financial services act

Question 22

Name 3 main changes the Financial services act made to the structure of the UK banking sector

Answer 22

Separated everyday banking activities from more risky investment activities

Depositors covered under the FSCS must be repaid as priority if a bank fails

Government given power to ensure that banks can absorb losses easier

Question 23

What did the Financial Service Act (2012) do?

Answer 23

Established a new system of regulation.

Question 24

Name the 3 main ways the Financial Services Act is set up

Answer 24

Financial Ombudsman Service - handles customer complaints

FCSC - compensates customers if their FSP fails to

MoneyHelper - Information service by the government that was set up to help people make informed financial decisions

Question 25

Name 3 threshold conditions required by the PRA

Answer 25

Holding enough cash
Having suitable management
Conducting business prudently

Question 26

What is the aim of the FCA?

Answer 26

To ensure that more financial markets work well so that consumers get a fair deal.

Question 27

Name 3 objectives of the FCA

Answer 27

Secure an appropriate degree of protection for customers

Protect/enhance integrity of the UK financial system

Promote effective competition in interests of consumers

Question 28

What are 3 actions the FCA can take if providers have broken FCA rules?

Answer 28

Imposing fines on providers/individuals

Withdrawing/suspending a providers authorisation to operate

Ordering providers to compensate customers

Question 29

What is the key role of the FOS?

Answer 29

To handle complaints between financial businesses + their costumers.

Question 30

How is the FOS funded?

Answer 30

All financial businesses that are covered by the service and are regulated by the FCS pay an annual levy.

Businesses may also have to pay an individual case free when a complaint is handled about them.

Question 31

What is the maximum amount of compensation the FOS can order providers to pay?

Answer 31

Depends on the financial product involved:
Deposits, investment and mortgages are covered up to a maximum of £85,000 per person per provider

Question 32

What are the 3 steps that a customer who has a complaint should take?

Answer 32

Contact the provider directly
Contract the FOS
Take the matter to court

Question 33

How is the FSCS funded?

Answer 33

By the financial services industry. Firms authorised by the financial conduct authority (FCA) and prudential regulation authority (PRA) pay them a levy.

Question 34

How much can the FSCS compensate for deposits?

Answer 34

£85,000

Question 35

How much can the FSCS compensate for investments and mortgages?

Answer 35

£85,000

Question 36

What are the 4 responsibilities of the CMA?

Answer 36

To investigate mergers that could restrict competition

To conduct market studies and investigations in whole markets where there may be competition and consumer problems

Enforcing consumer protection legislation to tackle practices and market conditions that make it difficult for consumers to exercise choice

To bring criminal proceedings against businesses and individuals who take part in ‘cartels’

Question 37

What are cartels?

Answer 37

When competitors agree to fix prices, rig bids, share markets or limit output at the expense of customers.

Question 38

The lending code was created by HMRC. True or False?

Answer 38

False - it was created by the British Bankers Association (BBA)