Unit 3 Topic 3 Flashcards

Question

What has been introduced due to the risk of mis-selling and other problems?

Answer 1

Because of the risk of mis-selling and other problems, there are now several consumer protection agencies that help to protect financial services consumers.

Answer 2

The FCA now has responsibility for regulating consumer credit – ie loans and hire purchase arrangements, which retailers often use to help consumers finance the purchase of furniture, domestic appliances, cars, etc.

Answer 3

The Financial Ombudsman Service is an INDEPENDENT official body, the role of which is to investigate consumer complaints and to resolve disputes between financial services consumers and providers.

Answer 4

The FOS is funded by an annual levy that every provider covered by the scheme is obliged to pay, and case fees are paid by providers if the complaints about them referred to the FOS exceed a certain number.

Answer 5

The Financial Services Compensation Scheme provides a safety net if a bank, building society or certain other financial services business cannot pay its customers’ claims because it has gone out of business.

Answer 6

All businesses authorised by the FCA are covered.

Answer 7

The FSCS is also, like the FOS, funded by the providers who are members of the scheme and this includes the cost of any compensation pay outs.

Answer 8

In addition to these organisations (FCA, FOS and FSCS), the Competition and Markets Authority (CMA), Citizens Advice and local authority trading standards offices also have powers and responsibilities for consumer protection more generally across all industries and businesses. These powers may not be specifically targeted towards financial services, but providers must nonetheless adhere to this more general system of consumer protection regulation.

Answer 9

Regulation and consumer protection can be seen as measures that primarily try to prevent financial services providers from engaging in practices (such as mis-selling) that, if left unchecked, would adversely affect consumers’ personal finances.

Answer 10

There is another set of government policies – known collectively as the political agenda – that is focused more directly on helping to ensure that every individual has access to the benefits that financial products and services can provide. E.g. social exclusion and social inclusion, financial exclusion and financial inclusion.

Answer 11

If certain groups of people or individuals in certain situations are denied access to the benefits enjoyed by most people in their society, they may be said to be ‘socially excluded’. Those who are unemployed, for example, or those who do not have a permanent address, or those who have a poor credit history have often found it difficult to open a bank account or to take out a loan.

Answer 12

A society in which there is full social inclusion is therefore one in which all members of society: - can participate fully in community life - can influence decisions affecting them - are able to take some responsibility for what goes on in their communities - can exercise a right of access to the information and support that they may need to do all of these things - have more equal access to services and facilities.

Answer 13

Many people find themselves socially excluded to a greater or lesser degree, perhaps because they: - have a physical or mental illness or disability - have poor basic skills (ie literacy and / or numeracy) - live in a deprived urban area or a remote rural area - have a low income because they work in low-paid jobs - are not working because they have been unable to find work - are homeless or have no fixed address to give to an employer or a bank - are (illegally) discriminated against on grounds of ethnicity, religion, gender, age or disability

Answer 14

''Social exclusion is a complex and multi-dimensional process. It involves the lack or denial of resources, rights, goods and services, and the inability to participate in the normal relationships and activities, available to the majority of people in a society . . . It affects both the quality of life of individuals and . . . society as a whole''

Answer 15

A key aspect of social exclusion is ‘financial exclusion’ – ie the inability to get access to even the most basic financial services products and services.

Answer 16

Financial exclusion can be caused by the same issues as social exclusion, such as mental health issues or being unable to afford financial products, but there is an additional factor: the individual’s financial literacy.

Answer 17

The term ‘financial literacy’ refers to an individual’s level of knowledge and understanding of financial matters. Those who have ‘low financial literacy’ may not know how to go about managing their personal finances, or may not be aware of the range of financial products and services that might help them to improve their financial well-being.

Answer 18

One measure of financial exclusion is the number of people who do not have a bank current account. Up until the early 2000s, almost one in four low-income families were in this situation – often, retired people, low-paid employees or self-employed workers being paid ‘cash in hand’, or those who, for some other reason (perhaps because they did not trust banks or understand how current accounts work), preferred to use cash to pay for all of their bills and spending. Other people who wanted a current account were unable to get one because of a poor credit history or because they did not have a permanent address.

Answer 19

If someone has no bank account, not only is that person unable to make use of the numerous ways in which a current account allows its holder to make and receive payments and transfers, but also their access to other financial services is restricted. - Some savings accounts require that the customer has a current account. - Personal loans, credit cards, hire purchase and insurance policies usually require monthly payments to be made by direct debit. - Gas, electricity and other utilities companies often offer discounted prices if the customer makes payments by direct debit. - Some employers will only pay wages and salaries directly into an employee’s bank account.

Answer 20

For those relying on government benefits, not having a current account became a particular problem when the government began to change the way in which it made these payments. Before 2003, claimants who had no account into which a payment could be made directly received a fortnightly cheque, which they could cash in at any Post Office; from 2003, benefits became payable directly into bank accounts by automatic credit transfer.

Answer 21

Realising that this (benefits being paid into a bank account) would cause real problems for the large number of claimants who had no bank account, the government consulted with representatives of the banking industry. The result was a ‘universal banking’ policy: essentially, a commitment by the banks and building societies to offer stripped-down ‘basic bank accounts’ to any applicant, regardless of that applicant’s status. A basic bank account typically offers no overdraft facility or cheque book (although account holders may be offered a cash card or debit card); some cannot be accessed online and some cannot be used to make payments by direct debit or standing order.

Answer 22

In addition to basic bank accounts, another option became available to those without a bank account: the Post Office Card Account. This operates in the same way as a basic bank account, except that access to the account is through a local post office, which means that those who are used to cashing their benefit or pension cheques in this way are able to continue to get cash from the same place, rather than having to set up an account at a bank or building society branch.

Answer 23

Santander - Min age to open = 16 - Can use standing orders and direct debits, DOESN'T have debit card. Bank of Scotland - Min age to open = 18 - Can use standing orders and direct debits, DOES have debit card. Barclays - Min age to open = 18 - Can use standing orders and direct debits, DOES have debit card. HSBC - Min age to open = 16, Can use standing orders and direct debits, DOES have debit card. TSB - Min age to open = 18, Can use standing orders and direct debits, DOES have debit card. Nationwide - Min age to open = 18, Can use standing orders and direct debits, DOES have debit card. NatWest - Min age to open = 18, Can use standing orders and direct debits, DOES have debit card. RBS - Min age to open = 18, Can use standing orders and direct debits. DOES have debit card.

Answer 24

The introduction of basic bank accounts and Post Office Card Accounts proved to be very successful, bringing the percentage of low-income families without a current account down from almost 25 per cent in 1999–2000 to only 5 per cent by 2008–09. Even with this improvement, however, in 2010 there remained 1.75m people in the UK without a current account.

Answer 25

In 2010 there remained 1.75m people in the UK without a current account this prompted the government at that time to declare its intention to impose on banks a legal obligation to provide basic bank accounts for everyone. While this intention was never implemented, it had the effect of encouraging banks to do more to promote basic bank accounts – and this resulted in a further fall in the numbers of people without an account to around 1m by November 2013.

Answer 26

Consumer rights campaigners believe, however, that many providers still do not publicise their basic bank accounts enough – suggesting that this is because the accounts are costly for them to operate and because there are no compensating profits from cross-selling other products to account holders. ''We believe . . . that . . . banks need to be strongly encouraged, or ultimately required, to . . . meet a set of minimum standards in order to have a level playing field – and consistency across the country – on access to basic bank accounts that give consumers the basic functionality they need.'' (Mike O’Connor of Consumer Focus, quoted in Andrew, 2013)

Answer 27

The Money Advice Service is one such initiative aimed at promoting social inclusion in general and financial inclusion in particular. It is funded by a levy on financial services firms, it is an independent financial advice and information service, the aim of which is to provide, by means of its website and publications, clear information and advice to people on how to manage their money.

Answer 28

The government has also encouraged banks and other providers to: - offer a range of products (in addition to basic bank accounts) aimed at the financially excluded – usually low-cost, low-deposit products that are relatively simple and straightforward, and therefore easy to understand - provide information on products in a way that is accessible to everyone – eg offering versions in languages other than English, or in Braille for people with visual difficulties - make their own efforts to promote inclusion through financial education, to help people to understand how financial products can help them and to encourage people to make more use of appropriate products.

Answer 29

In response to encouraging financial inclusion and literacy, several banks, building societies and credit unions have developed their own financial education resources. - Under its ‘Moneysense for Schools’ programme, NatWest offers free interactive resources online. (It also offers as a range of product guides and videos on its main website, targeting those over school age.) - Ipswich Building Society offers its Money Metrics programmes for various age groups. The sessions take place in schools and other places, such as prisons. - Barclays ‘Life Skills’ programme is another initiative offering free downloadable resource packs online, providing information on personal finance and careers.

Answer 30

Websites are just one of the ways in which increasing use of the internet has played a part in reducing financial exclusion – something that the government has also encouraged by means of policies aiming to make broadband available to the majority of the population. Another way in which the internet has helped to reduce financial exclusion is by offering a means of accessing financial services to those who: - are housebound and unable to get to a bank branch - have a disability (eg visually handicapped people can use screen readers and voice synthesisers) - work shifts or unsocial hours and may not be able to phone or visit their financial providers during normal working hours - are intimidated by the office of a financial provider and / or feel uncomfortable with sales staff, preferring to research providers and products in their own home and in their own time.

Answer 31

In an unregulated, ‘free market’ financial world, individual consumers would be exposed to unscrupulous, dishonest or incompetent providers whose only objective would be to maximise their short-term profits by selling as many products as they could at the highest prices possible.

Answer 32

Many economists would say that little, if any, regulation of the way in which products are bought and sold is necessary if the market for those products is close to what is known as a ‘perfect market’. A high level of competition between suppliers is not the only requirement for a perfect market. If you want to be confident that you are buying the product that will best meet your needs, at the best possible price, you also need to be well informed and knowledgeable about: - the product itself (its features, benefits, initial and future costs, etc) - the best way in which to buy it (ie which retailer is offering the product with the best balance of price, quality and customer service) - your own needs and the products available to meet those needs. Ideally, you will have ‘perfect knowledge’ of each of these things.

Answer 33

When consumers are not fully informed about a product – when knowledge in one of these areas is lacking, ie when there is what economists call ‘information failure’ – there can be no guarantee that free competition and market forces will deliver the best products at the best prices – ie there is ‘market failure’.

Answer 34

The Sale of Goods Act 1979 gives consumers the right to return goods that are ‘not fit for purpose'. This is an example of general consumer protection legislation and regulation protecting consumers from being sold any product that does not meet their needs.

Answer 35

The legislation and regulation that protects consumers in general is not extensive enough to ensure consumer protection in the context of financial services. The major banking and finance ‘scandals’ that have hit the headlines over the past few years have shown that, even with a strong regulatory system, the financial services industry is still by no means a perfect market. That system therefore has to be revised and updated constantly to deal with failings as they become apparent.

Answer 36

The practice of mis-selling payment protection insurance (PPI) to customers who were taking out loans is one example of a scandal that had a major impact on consumers and on the providers who were involved. The fact that this mis-selling was so widespread and had gone on for more than ten years before the regulators stepped in was another factor contributing to the reform of the regulatory regime in 2013 to try to prevent similar problems from happening again.

Answer 37

By thoroughly reforming the way in which financial services are regulated, the government hopes to restore consumer confidence in the effectiveness of the regulatory system – and hence to restore customers’ trust in financial services providers – which is essential if individuals are to maintain their personal financial stability.

Answer 38

While regulation brings many benefits for individual consumers of financial services, it is not without its costs. As the number or scope of regulations with which providers have to comply increases, so too does the amount that they must spend on staff training, on maintaining adequate compliance departments, on administration, and on registration fees and levies to fund some of the regulatory and consumer protection bodies – not to mention the fines and compensation payments that they must pay when things go wrong. New legislation can also increase providers’ costs if they have to redesign products, product literature and advertisements, and retrain sales and administrative staff.

Answer 39

Additional costs will have an impact on the individual. The company may accept lower profits, but this will mean cutting dividends distributed to its shareholders. The company may offset the increased costs of compliance by reducing other costs, eg it may cut staffing costs by restructuring and negotiating redundancies, or it may ‘freeze’ salaries and annual staff bonuses at their present levels. Major changes in the regulatory system have even led some providers to leave the industry entirely because they are unable to make a profit. Consumers too end up carrying the costs of regulation by paying higher prices for the products that they need or by going without products they cannot afford. They may also suffer if providers reduce the range of products and services that they offer, leaving consumers with fewer choices.

Answer 40

When we refer to economic factors in the context of financial services, we are referring to changes in: - interest rates, which are related to: −inflation −house prices (and thus activity in the housing market) −savings and investments -economic activity, government spending and unemployment - the global economy and exchange rates.

Answer 41

Interest rates can be described very simply as ‘the price of money’ – ie they are the price that banks charge borrowers for the money that they lend and the price that banks pay to savers for the use of the money that they have deposited with the bank.

Answer 42

Interest rates are also used as a central tool of government and central bank economic policy. Historically, throughout most of the 1970s and 1980s, interest rates in the UK were high – generally more than 10 per cent – falling to just over 5 per cent only in 1994. From then until 2007, interest rates rose and fell regularly, but never drifted above 7.25 per cent or below 3.75 per cent. However, the financial crisis of 2007–08 and the economic recession that followed prompted the Bank of England’s Monetary Policy Committee (MPC) to cut Bank rate dramatically in March 2009 to an unprecedented 0.5 per cent, where it stayed for over seven years. In August 2016, Bank rate was lowered further to 0.25 per cent, as a result of uncertainty following the UK’s decision to leave the European Union. Although the MPC increased Bank rate slightly in 2017 and 2018, in March 2020 Bank rate was lowered to an historic 0.1% in response to the economic instability created by Covid-19, ie coronavirus.

Answer 43

The reason for changes in interest rates is that changing Bank rate is the way in which the Bank of England tries to manage inflation.

Answer 44

Basic economic theory tells us that if there is ‘too much’ spending – if consumers are demanding more than businesses are able to supply – prices will tend to rise as businesses take advantage of the excess demand to boost their profits. If this happens on a widespread basis, the result is a general trend of rising prices, otherwise known as inflation.

Answer 45

In May 1997, the government gave the Bank of England the power to set Bank rate independently of government – a change later formalised under the Bank of England Act 1998. The Bank was also given responsibility for using Bank rate to deliver ‘price stability’ – ie to maintain the annual rate of inflation at around 2 per cent. If the Bank’s MPC believes that inflation is likely to remain higher than the target rate, its response is to increase Bank rate.

Answer 46

When Bank rate goes up, most lenders will automatically increase the interest rates that they charge on loans, credit cards, mortgages, overdrafts, etc. Borrowers with variable-rate mortgages or credit cards will face higher monthly payments, leaving them with less money to spend. Those who have made effective short-term, medium-term and long-term personal financial plans, including contingency plans that make provision for rising interest rates and inflation, will be able to manage these higher monthly payments, often by cutting back on their discretionary spending. Others who were considering a loan or hire purchase as a means of buying a ‘big ticket’ item (eg a car or furniture) may be put off by the higher interest rates and delay the purchase until the cost of credit comes down again. All of this helps to achieve one of the MPC’s objectives in increasing the Bank rate: to reduce consumer spending. Lower spending will reduce overall demand for products and services, which will, in turn, put pressure on businesses to reduce their prices.

Answer 47

For many individuals, a high and rising rate of inflation will mean having to spend a larger proportion of their income on the goods and services that they regularly consume. This may significantly affect their financial plans by reducing the amount that they are able to save and increasing the likelihood that they will have to borrow money. Increasing interest rates to keep inflation in check therefore helps those living on a fixed income with little or no debt by ensuring that their income continues to cover their expenditure.

Answer 48

Those with high levels of debt are better off if interest rates are kept low and inflation is allowed to rise, because lower interest rates will keep down the cost of servicing their debts, while inflation will reduce the amount that they owe in real terms.

Answer 49

When interest rates are rising, some people will inevitably find it harder than others to meet their monthly mortgage payments and will begin to fall into arrears. Some will default on their mortgages and have their homes repossessed. The higher cost of mortgages will also reduce demand for houses and flats, because potential buyers may decide that they can no longer afford the mortgage they need to buy a property. Falling demand will then cause property prices to fall across the housing market and builders may decide to build fewer new properties.

Answer 50

The housing market is such a large part of the national economy that changes in house prices and demand for housing have a significant impact on economic activity as a whole. This is as true in the UK as it is across most European countries, where it has been the ambition of many people, since the 1960s, to own their own homes. In the UK around two-thirds of the population are owner-occupiers, this figure is much higher in some countries.

Answer 51

Ranking Country population(%) 1 Romania 95.8 2 Hungary 91.7 3 Montenegro 91.0 4 Slovakia 90.9 5 Lithuania 90.3 6 Croatia 89.7 7 North Macedonia 85.9 8 Poland 84.2 9 Bulgaria 84.1 10 Serbia 83.3

Answer 52

The importance of the housing market within the national economy can be illustrated by following its progress from before the financial crisis through to the time of writing.

Answer 53

Before the financial crisis of 2007–08, interest rates had been relatively low since the mid-1990s: it was widely felt that inflation had been brought under control and was no longer a serious threat to the economy. Banks and building societies were able to borrow money easily and cheaply on the money markets, and were therefore able to make mortgage loans cheap and easily available, requiring that prospective borrowers put down little or no cash deposit. Demand for houses consequently increased and house prices rose rapidly.

Answer 54

Higher house prices began to make buying a house or flat more expensive for first-time buyers, who needed to save up more money for even a small deposit and who needed to make higher monthly repayments on their mortgages, those who already owned a home were able to use the increase in the value of the home that they were selling to put down a bigger deposit on the more expensive house that they wanted to buy. The willingness of banks and building societies to lend 100 per cent of the value of the property – with some even offering 125 per cent – and up to a multiple as high as seven times buyers’ annual incomes meant that many people were able to borrow more than they could sensibly afford – and this kept demand high.

Answer 55

Having lived through decades during which house prices seemed only to go up year after year, many people now saw buying a home not only as a way of putting a roof over their own heads, but also as a major investment that would provide a lump sum of capital to help them through their retirement years and which they might eventually pass on to their children.

Answer 56

With house prices rising, people who had already bought their homes felt wealthier: they owned a property that had significantly increased in value since they had bought it, which meant the equity in that property – ie the difference between the market price and the outstanding mortgage balance – had grown. Those who had taken out a repayment mortgage some years earlier also found that they had repaid quite a lot of their original mortgage, which also increased equity. In both instances, homeowners were able to convert this equity into cash by borrowing from banks and building societies on the basis of secured loans or second mortgages – commonly known as ‘equity loans’ or ‘mortgage equity withdrawal’.

Answer 57

Banks and building societies were willing to lend in this way (lending 100% and sometimes 125% mortgages on properties) because the loan was secured on the increased value of the house. They believed that there was little chance that they would lose their money even if the borrower were to default, because they could repossess the home and sell it for the increased price, thus covering the amount still owing on the loan. Few experts believed that property values would fall in the foreseeable future.

Answer 58

Some people used the extra cash to improve their properties – which is a sensible strategy if the improvements increase the value of the property by more than the costs of carrying them out – but others used equity loans to buy consumer goods or to finance life events and emergencies. Because interest rates on secured loans are always lower than those charged for unsecured personal loans, hire purchase or credit cards, some consumers simply saw equity loans as a cheaper way of borrowing money. Lenders rarely pointed out to customers that taking out an additional secured loan to pay for a one-off holiday, new furniture, a wedding or a new car over a period of 15, 20 or 25 years would actually cost the customer more than doing so using a personal loan in the long run, because they would be paying interest on the secured loan for so much longer.

Answer 59

In a booming housing market, there is also increased demand for other complementary financial products. Borrowers needed to take out buildings and contents insurance; they also bought life assurance to cover the financial consequences to their families should they die before paying off their mortgage.

Answer 60

If house prices had continued to rise year on year in the United States, Europe and other Western economies, the banks and their customers might have continued to enjoy these benefits – but the house price ‘bubble’ burst. It is the collapse of the US sub-prime housing market – ie the market for mortgages among those with low credit ratings, who are thus least able to repay and most likely to default – that is often seen as the event that triggered the 2007–08 global financial crisis. At the end of 2006, house prices began to fall dramatically in the United States, and those in the UK and Europe followed suit throughout 2008 and 2009 (Christie, 2006).

Answer 61

As the financial crisis bit deeply, central banks in the United States, UK and Europe dramatically cut Bank rate to try to stop the crisis from causing a deep economic recession, which meant that the cost of borrowing money also fell. We have already noted that, in general terms, falling prices for any product or commodity will tend to increase demand, because people who could not previously afford to buy them now find that they can – but this was not the case in the post-crisis housing market.

Answer 62

Anxious to avoid the risks involved in making mortgages too easy to obtain (for which they now found themselves heavily criticised), banks and other mortgage lenders tightened their lending criteria: the ‘credit crunch’. They reduced their maximum loan-to-value ratios – ie the ratio of the amount of mortgage loan to the market value of the property – to 75 per cent or less; they dropped mortgage income multiples back down to three times gross salary or less; they tightened up their credit scoring procedures. People who now could not get mortgages as easily either had to buy cheaper houses or had to withdraw from house purchase altogether – a situation that began to ease only in 2013.

Answer 63

Near the end of 2020, UK house prices were rising at the fastest rate in four years. Due to the Covid-19 pandemic, the government had temporarily scrapped stamp duty land tax for a majority of buyers, leading to a big increase in prices. However, house prices were expected to fall again when stamp duty was eventually reinstated, and because of the continued economic uncertainty surrounding Covid-19 and enforced lockdowns. Very low borrowing costs, ie interest rates, were hoped to balance these forces and boost the housing market.

Answer 64

If fewer people are buying or moving house, it not only reduces demand for new builds, but also for goods, such as new furniture, and for the services of builders, decorators, plumbers, electricians, estate agents, surveyors, solicitors, etc. People start to lose their jobs and others become afraid that their jobs may be under threat. Many people in this situation will reassess their personal finances in order to protect themselves against the prospect of losing their job and the income that they are used to having.

Answer 65

A typical reaction among the majority of people in the face of the financial crisis was to try to reduce personal debts (mortgage, loans, credit cards, etc), to increase regular savings and try to build an adequate emergency fund, and to avoid taking on any new debts.

Answer 66

The homeowners worst affected by the crisis and subsequent economic recession were those who had used high loan-to-value mortgages to buy their properties or had taken advantage of mortgage equity withdrawal, and who now faced the prospect of ‘negative equity’ – ie of the amount of money that they still owed on their mortgage loan being greater than the market value of their property.

Answer 67

Those affected who can still manage to meet the monthly loan repayments on the mortgage are generally able to manage this situation by simply staying put until the market improves – but those who default on their repayments take a double blow: not only may they be forced to leave their home when the lender repossesses the property, but they may find that they still owe money to the lender when the forced sale fails to cover the debt in full.

Answer 68

By cutting Bank rate as far as possible, the Bank of England undoubtedly helped millions of mortgage holders to keep up to date with their monthly payments and avoid getting into arrears. In this way, the Bank has kept down the numbers of people who have defaulted on their mortgages and had their homes repossessed. Problems remain, however, for those who are ‘marginal borrowers’ – ie people who are only just managing to pay even at a lower interest rate and who will be unable to meet even a small increase in monthly repayments when interest rates begin to rise once more. Not only will these people lose their homes (and see above for the impact should they have negative equity), but they will also suffer the effects of the resulting footprint on their credit history, identifying them as a bad credit risk and making it difficult for them to get a mortgage or any other form of credit in the future.

Answer 69

Year No. of repossessions No. of mortgages in arrears of 2.5% or more 2008 40,600 600,000 2009 48,900 833,000 2010 38,500 734,000 2011 37,300 668,000 2012 33,900 635,000 2013 28,900 609,000 2014 20,800 504,000 2015 10,200 425,000

Answer 70

While rising interest rates causes problems for borrowers, it is a different story for savers. When Bank rate rises, banks and building societies can increase the interest rates that they charge to borrowers and increase the interest rates that they pay to those who have deposited savings without having to narrow profit margins. The main beneficiaries will be retired people and others who rely on their savings to provide an income. The majority of retired people have paid off their mortgages and tend not to have many other debts, so they will rarely be as badly affected by interest rates going up on borrowing. Paying higher interest rates to savers may also affect people’s attitudes to saving and borrowing – encouraging them to save more of their income rather than to spend it – which further adds to the downward pressure on demand and prices.

Answer 71

Interest changes can also affect investors, because the prices of shares listed on the stock market may fall after a rise in interest rates. Remember that when the Bank of England’s Monetary Policy Committee (MPC) increases Bank rate, it is hoping that increasing the cost of borrowing will reduce consumer and corporate spending, thereby reducing the overall (or ‘aggregate’) demand for goods and services. If demand for goods and services does fall, however, sales revenues will fall. Corporate profits will therefore be ‘squeezed’ by falling revenue and rising costs, and lower profits makes buying shares less attractive (particularly if potential investors can get good rates of interest on savings products). As demand for shares falls, so share prices will tend to fall across the board.

Answer 72

A fall in the stock market generally affects the wealth of many people and businesses. Those who have invested directly in the stock market – by buying shares in particular companies or by putting money into collective investments, such as unit trusts or OEICs – will suffer an immediate reduction in wealth; many other individuals are also indirectly exposed to what happens in the market as a result of the effects on pension fund and insurance company fund investments.

Answer 73

A period of economic growth in the five years before the financial crisis saw a steady rise in share prices: the FTSE 100 index, for example, increased from 3940 in 2002 to almost 6500 by 2007. But the global financial crisis caused a dramatic stock market crash, which cut the FTSE 100 back down to just under 4500 by the end of 2008.

Answer 74

One effect of these huge changes (stock market crash) was that many people lost faith in investment products. They began to look for alternative places to keep their money – products that offered the safety and security of a savings account, but also had the potential to provide a return higher than average interest rates, even when stock markets were falling. Providers responded to these changes in consumers’ attitudes to risk by developing new ‘structured products’, which (it is claimed) offer a safer home for people’s savings than the stock market, while still allowing them to benefit from share price growth.

Answer 75

Guaranteed growth or guaranteed capital plans use complex investments called derivatives to offer investors a return linked to the stock market over a set period of years. ◆If the stock market goes up in value, investors get their money back plus growth based on the amount by which the stock market has gone up. ◆If the stock market falls, they either get back only their original investment (hence ‘guaranteed capital’), or get back their original investment plus a minimum growth amount, eg 4 per cent (hence ‘guaranteed growth’). But these products cannot entirely eliminate risk: their complex structure means that they are not covered by the Financial Services Compensation Scheme (FSCS) – and that means that investors risk losing their money if the bank goes bust.

Answer 76

A healthy, balanced economy is one in which demand for goods and services is high enough to keep unemployment at an acceptably low level, but is not so high that it causes unacceptable levels of inflation.

Answer 77

Economic activity in the UK is fuelled by demand for the goods and services from four main sources: ◆consumer demand refers to the amount that individuals are spending on the goods and services that they are consuming, spending that is funded by consumers’ incomes, savings and borrowings; ◆corporate demand is the amount that businesses are spending on the goods and services that they are consuming, spending that is funded by a business’s revenue, savings and borrowing, and by capital injections from its investors; ◆government spending is the amount that national and local government departments and agencies are spending on the goods and services that they are consuming, which spending is funded by tax revenues and government borrowings; ◆demand for exports refers to the goods and services produced in the UK, but sold overseas.

Answer 78

One of the government’s key roles and objectives is to use the economic tools available to it to achieve and maintain full employment and low inflation. When inflation goes above the government’s 2 per cent target, interest rates are increased to reduce consumer and corporate spending, putting downward pressure on prices. On the other hand, when prices are stable and unemployment is growing because of a lack of demand, interest rates may be reduced to make it cheaper for individuals and businesses to borrow money to spend on goods and services, thus increasing consumer and corporate demand. This manipulation of interest rates is known as ‘monetary policy'.

Answer 79

Mark Carney, formerly governor of the Bank of Canada, was appointed as governor of the Bank of England in July 2013. One of his first actions was to issue a ‘forward guidance’ statement setting out what the Bank expected to happen to interest rates in the future. The statement formally linked interest rates with the rate of unemployment, as well as inflation, when Carney said that Bank rate would not be increased until unemployment fell to 7 per cent. This would not apply, however, if the rate of inflation – which, at 2.7 per cent, was above the 2 per cent target, but stable – were to threaten to spiral out of control. Neither did this mean that an interest rate increase would be automatically triggered by unemployment hitting 7 per cent. This was demonstrated in January 2014, when the Bank did not consider it necessary to increase Bank rate even though unemployment had fallen to 7 per cent, on the basis that inflation had also fallen to the government’s 2 per cent target.

Answer 80

It is important for the government to manage the amount of money that it raises in taxation, the amount that it borrows on the financial markets, and the overall amount that it spends. This is known as ‘fiscal policy’.

Answer 81

Whenever the government changes its policies on taxation, borrowing and / or spending, this has the potential to affect economic activity. There are different opinions among economists, politicians and political parties as to what should be the ‘correct’, or ‘optimum’, levels of government spending and how much of it should be financed by taxation or borrowing. Put simply, if the amount spent by the government each year is more than the amount raised through taxation, then the government’s budget is said to be running a deficit, which has to be financed by government borrowing. (Government borrowing is largely funded by means of gilt-edged securities, or ‘gilts’, which are bonds sold to investors and guarantee a set return on a set date.) Any borrowing that is not immediately repaid is added to the overall government debt. The aim of most governments is to ‘balance’ the budget (ie for spending to be equal to tax revenue) or to achieve an annual surplus (ie revenue greater than spending).

Answer 82

Many governments – like consumers – were encouraged by low interest rates and easily available credit to borrow more and more in the years running up to the financial crisis (leading to increasing budget deficits and outstanding debt). They used these borrowings to finance significant expansion in government spending – especially on education, public transport and the health service.

Answer 83

The Labour government, in power from 1997 until 2010, believed that it was right to increase government borrowing and debt to improve public services and to maintain full employment.

Answer 84

Government borrowing grew at an even faster pace after 2007 (after the Labour government had increased government spending), in the wake of the global financial crisis and recession, when the government faced: ◆the need to ‘bail out’ the failing banks with injections of funds, to save them from going bust and triggering a failure of the banking system as a whole; ◆rising unemployment, which led to increasing numbers of claims for state benefit payments (eg Jobseeker’s Allowance and Housing Benefit); and ◆the negative effects of that rising unemployment and of less activity in the housing market on government revenues from income tax, National Insurance contributions (NICs), value added tax (VAT), stamp duty, etc.

Answer 85

The 2010 general election offered voters a choice between a Labour government and a Conservative government with very different attitudes to combating the budget deficit. ◆Labour promised to reduce government borrowing slowly by maintaining public spending to combat the recession, hoping that boosting economic activity would lower unemployment, reduce spending on welfare benefits (because there would be fewer unemployed claimants) and increase tax revenues. ◆The Conservatives believed in an ‘austerity’ policy, which involved substantial cuts in public spending to reduce the amount that the government needed to borrow each year to cover the annual deficit and quickly restore a ‘balanced budget’ in which the deficit would be reduced to zero. In the event, there was no clear-cut victory of one over the other, and the Labour government was replaced by a coalition between the Conservatives and the Liberal Democrats.

Answer 86

The coalition government largely introduced Conservative austerity policies, meaning that, each year, government spending has faced serious cuts, which have led to thousands of jobs being lost in the public sector. The cuts were not enough to stop total government debt from growing – from £530bn in 2008 to £1,457.2bn in November 2014. This debt will not be reduced until the annual budget deficit is turned into an annual surplus, which will give the government money to start paying off its debts. The Covid-19 pandemic, which began in 2020, demanded huge government spending that increased the deficit and further impaired the aim of balancing the books.

Answer 87

The level of unemployment can undoubtedly have an impact on individuals’ personal finances, and on their choice of products and services.

Answer 88

High employment can lock people into a high-consuming lifestyle and it encourages a consumer culture. It also enables people to save money if they earn enough to have a surplus after they have satisfied their needs and everyday wants. People feel confident because they are earning money, and as a consequence their needs, wants and aspirations are probably less influenced by fears for the future than they might otherwise be. Having a secure job can also affect a consumer’s appetite for different financial products, such as savings accounts, overdrafts and credit cards, mortgages, pensions and insurance.

Answer 89

High unemployment makes for a very different market. The long-term unemployed – defined by the Office for National Statistics (ONS) as those who have been continuously unemployed for more than 12 months – have to rely on state benefits for their income and do not have the resources to buy financial products, even though they may still need them. At times of high unemployment, even those who have a job probably feel uncertain about the future. Rather than putting money into risky investment products, the financial priorities of these people are more likely to be focused on: ◆protection, eg insurance against the effects of losing a job; and ◆security, eg low-risk savings products with which to build up a ‘rainy day’ fund.

Answer 90

The long-term unemployed is defined by the Office for National Statistics (ONS) as those who have been continuously unemployed for more than 12 months

Answer 91

Changes in exchange rates (ie the purchasing power of the pound sterling against other currencies) and changes in the global economy can affect personal financial planning. These factors are considerably more important now than they were 100 years ago because of the effect of ‘globalisation’ – ie the integration of the economies of individual countries around the world.

Answer 92

The 2007–08 global financial crisis, yet again, illustrates clearly the impact of globalisation. A hundred years ago, the collapse of the US sub-prime market in mortgage lending might have affected only banks and investors in the United States; in the present day, globalisation has resulted in an international financial services industry comprising many multinational banks, insurance companies and other providers with offices scattered across the globe providing services and selling financial products to an enormous customer base. The extent of the connections between these providers – with fund managers in one country investing in the products of a firm based in another – is considered to be one of the reasons why the US collapse was so contagious: many banks in the UK and Europe were ‘exposed’ because they had invested their money in ‘toxic’ collateralised mortgage obligations (CMOs) – a way of repackaging mortgage debts into investment products. Many European banks were so badly affected that they had to be rescued by government bailouts. Many European governments had already increased their public spending and borrowing substantially during the ‘boom’ years; having to borrow more money to support their banks added to their debt, leading to a financial crisis among the countries that had adopted the euro as their currency (known as the euro area, or eurozone) that, at one point, threatened the continued existence of the euro itself. Greece, in particular, had developed a huge public sector debt, and had to borrow enormous amounts of money from the European Union and also from international markets to prop up its economy. Ireland nearly went bankrupt when its property sector crashed and the government had to bail out some of its banks. The UK government itself lent a significant amount to the Irish government when it became clear that the subsidiaries of two UK banks (RBS and Lloyds) had made large loans to Irish property developers, many of which loans had turned bad, threatening big losses for the UK parent companies. Spain, Italy and Portugal also experienced large annual public sector deficits resulting in huge government debts.

Answer 93

The impact that the economic policies adopted by foreign governments, and the conduct of foreign banks and other financial services providers, can have on the national economy and on individuals’ personal finances has never before been as clear as it has become in recent years.

Answer 94

Factors that illustrate globalisation are the extent to which people regularly travel abroad, either on holiday or on business, and the growth of imports and exports of raw materials, components, and semi-finished and finished goods. All of this activity has an impact on foreign currency exchange rates – particularly the value of the pound sterling (£) against the euro (€) and the US dollar ($). In today’s globalised economy, for example, a UK manufacturer might buy raw materials from France, paying its French supplier in euros, and export what it makes to the United States, getting paid in US dollars. At the same time, it pays its UK costs, such as wages and rent, in pounds sterling.

Answer 95

Due to globalisation, individuals and businesses consequently need financial providers to supply: ◆foreign exchange services, eg people who want holiday spending money will want to buy travellers’ cheques or pre-paid foreign currency cash cards; ◆buy-back guarantees, which mean that purchasers can sell any unspent currency at the same rate at which they bought it, meaning that they are protected against adverse currency movements; ◆credit and debit cards that will be accepted abroad, including in cash machines; and ◆products that help businesses to manage exchange rate risk, so that they will not lose if exchange rates move against them.

Answer 96

In the past, many governments fixed the exchange rates of their currencies, rather than allowing them to ‘float’ – ie to be determined by the forces of demand and supply in the currency markets, which is largely what happens now.

Answer 97

If a country were experiencing an economic downturn, the government could ‘devalue’ its currency – simply by selling the currency at a lower price on the international currency markets. If the UK government, for example, were to decide to use devaluation as an economic tool and reduce the price of the pound sterling in US dollars from $2 to $1, the cost of buying UK-produced products and services to those paying in US dollars would be halved, which would produce a surge in demand for UK exports. The downside of doing so, however, would be that the cost (in sterling) of buying goods and services imported from other countries would now be double what it was before devaluation. This would lead to a substantial increase in the rate of inflation (although it would make it easier for UK companies to compete in the domestic market against rival imported goods and services).

Answer 98

In 1999, the euro replaced the national currencies of a number of European countries that had chosen to adopt it. Of the 27 member countries of the European Union, 19 have adopted the euro – and thus comprise the eurozone. Business carried out between two eurozone countries is all done in the same currency and there is therefore no exchange rate risk.

Answer 99

The UK chose not to join the euro when it was part of the EU – but a lot of UK customers do business in euros or have bought holiday homes in eurozone countries, and want to save and borrow money in euros. People in the UK can therefore be directly affected by changes in euro–sterling exchange rates. For example, if someone in the UK takes out a mortgage in euros with a Spanish bank to buy a property in Spain, it would be to their benefit if the value of the pound, in euros, were to go up. If they had initially borrowed, say, €100,000, with monthly repayments of €1,000 at a time when the euro–sterling exchange rate was 1:1 (ie €1 to £1), a rise in the value of the pound to an exchange rate of 2:1 (ie €2 to £1) would lower the sterling value of the mortgage debt to £50,000 and their monthly repayments to £500. (Of course, the sterling value of the property – ie how much it could be sold for – might also fall in the same proportion, offsetting some or all of the benefits of the stronger pound.) A fall in the value of sterling would have the opposite effect – eg a fall from 1:1 to 1:2 (ie €1 to £2, or 50 cents to £1) would double the sterling value of the same €100,000 mortgage to £200,000 and the monthly repayments to £2,000. This would not be a problem if the mortgage holder were to live and work in Spain, but it could be a serious financial problem if the owner were to live in the UK, because their income would be in sterling, meaning that they would feel the full effect of the exchange rate change

Answer 100

With floating exchange rates, there is an interaction between interest rates and exchange rates: if interest rates are generally higher in the UK than in other countries, for example, investors and investment fund managers in other countries will have an incentive to buy UK government and corporate bonds – but these are sold in sterling, so these investors will have to exchange their dollars, euros, etc, for pounds to be able to invest in the UK. The higher demand for sterling on the currency exchange markets will tend to increase the price of the pound, causing the value of sterling to strengthen.

Answer 101

Individuals should be aware that taking on debt in a foreign currency carries a significant exchange rate risk, which they should take into account when drawing up their financial plans. They must consider what would happen if exchange rates were to change significantly and they must put contingency plans into place to take account of potential future changes in the strength of the pound sterling. The same consideration should also be given to making investments in other currencies (such as buying shares in foreign companies that cannot be bought and sold on the London Stock Exchange). Any profit made from the rising price of shares bought (in dollars) on the New York Stock Exchange, for example, could be wiped out by an adverse movement in the dollar–sterling exchange rate.

Answer 102

When we refer to social factors in the context of financial services, we are referring to a wide range of cultural aspects, including changes in demographics, levels of employment and home ownership. Trends in social factors have a big impact on the type of goods and services – including financial services – that individuals demand.

Answer 103

When we speak of cultural issues, we are referring not only to people’s ethnic and religious backgrounds, but also more generally to the social groups to which they belong or in which they were brought up. Our cultural backgrounds tend to determine what ideas, beliefs, values and attitudes were instilled into us as children, the overriding ideas of our peer groups and what is important to us in our lives generally. Cultural factors affect people’s approaches to financial services, helping to determine which products they will buy and from which suppliers they will purchase them. They affect people’s needs, wants and aspirations, and ultimately their behaviour, including their financial behaviour.

Answer 104

Large sections of the UK population have family origins elsewhere in the world. Their values, attitudes and beliefs may be very different from those of people with other cultural backgrounds. Some people with family origins elsewhere may not be able to identify with the traditional ways of doing things in the UK – and this means that there is a risk that they will be excluded from using certain financial products and services unless providers take cultural differences into account when they are designing, marketing and delivering those products and services.

Answer 105

In many religions, lending and borrowing money is seen as an acceptable activity provided that lenders treat borrowers fairly and borrowers do not build up unsustainable levels of debt. Others, however, see debt as something to be avoided at all costs. They believe that it is wrong to lend someone money if you charge interest on the loan, and that it is equally wrong to borrow money and pay interest on the loan.

Answer 106

Under Islamic law, known as Sharia, it is forbidden to charge or pay interest (Riba). If an urgent need arises for someone to pay for something and they do not have enough money to do so, the options available to them are to borrow only from members of their own family group or to use a Sharia-compliant financial product.

Answer 107

There are now six stand-alone Islamic banks operating in the UK, and these provide Sharia-compliant home purchase plans, loans and savings. Some more mainstream banks – notably Lloyds and HSBC – recognised the potential in meeting the needs of the large Muslim community in the UK and developed their own Sharia-compliant products. But these products were not a commercial success and are no longer available in the UK.

Answer 108

In 2014, however, Britain became the first non-Muslim country to offer Sharia-compliant government bonds (Sukuk). Initial demand for the products (which matured in 2019) was high, with orders in excess of £2 billion.

Answer 109

A Sharia-compliant home purchase plan is a way in which devout Muslims can access money to buy a property without technically borrowing or paying interest. There are two widely used types of Sharia home purchase plan (Ijara and Murabaha); in both cases, the bank will buy the property in which the customer wants to live and allow the customer to repay in instalments.

Answer 110

Islam (and some other religions) also prohibits drinking alcohol and gambling in all of its forms. This means not only that investing directly on the stock market is strictly forbidden as a form of gambling, but also that Muslim customers must avoid certain investment products that might indirectly link to the stock market, such as investment funds, pensions or life assurance policies.

Answer 111

'Youth culture’ is the term used to describe the values shared by people in their teens and early 20s. It embraces everything from what you believe in to how you spend your leisure time and money. Changes in youth culture can affect how young adults manage their finances, and the kind of financial products and services that they use. In recent years, providers have had to work hard to keep up with the ever-changing options available for accessing information about financial services and for buying financial products. While making this information available and services accessible online, using PCs and laptops, has been standard practice for some years, providers are now being pushed to supply services that can be operated using smartphones and tablets. The rise in social networking sites and smartphone apps offers new opportunities for marketing to the innovative financial services provider – and keeping up to date with this technology is essential if providers are to supply the financial services that young adults need to keep their finances in order.

Answer 112

‘Grey culture’ refers to the older section of the population – ie those in late middle age and older stages in the financial life cycle – which has been getting bigger year by year across the world’s industrialised countries in recent decades and will continue to do so for the foreseeable future. This group of people has specific financial needs – for pensions, insurance, savings accounts and income-producing investments – and will often share certain values, such as respect for tradition, and the need for security and trustworthiness. As the world’s ageing population continues to grow, it will steadily become increasingly important as a target market for financial services.

Answer 113

In the latter half of the twentieth century, as standards of living rose and people in the industrialised world found themselves with more disposable income, a consumer culture emerged. A consumer culture, or consumer society, is ‘[a] society in which the buying and selling of goods and services is the most important social and economic activity’.

Answer 114

The trend of consumer culture continued apace through the first few years of the twenty-first century: people were spending more and more money, and even borrowing to finance what they wanted to buy. The trend was reversed in the immediate aftermath of the financial crisis of 2007–08. Since 2012 there have been signs that consumer spending is increasing – not least in terms of the housing market. However, due to Covid-19, UK consumer spending decreased by 7.1 per cent in 2020 as people saved their money and spent more on essentials.

Answer 115

Demographics involve analysing a population in terms of age, sex, ethnicity, culture, social status and geography – ie its demography. The demographic structure of a population and changes in that structure play a key role in the way in which providers design and market their products, because the individuals who can be grouped under a particular demographic heading may have very different needs, wants and aspirations from those in another. Demographics also tell providers a lot about the financial solutions that a target population is likely to need. Age is an important facet of demographics, for example, because the financial products that people need at different stages of the life cycle are very different. Other demographic factors are also important, however, because people’s needs, wants and aspirations can be influenced by the kind of people by whom they are surrounded.

Answer 116

As populations grow in size, financial providers see a rise in demand for their products. Population growth usually happens because health and life expectancy have improved, which means that a lot of people are living longer and remaining economically active for many more years than has been the case in the past. Many countries therefore now have an ageing population – ie a population of which an increasing proportion are over retirement age. This has made it less likely that the state will be able to provide adequate pensions for everybody, because it is the taxes paid by the working population that fund state pensions. The impact of this on the individual is that younger people need to plan their finances wisely (particularly pensions, insurance, long-term savings and investments) if they are to ensure that they will have sufficient income to live comfortably through a much longer period of retirement than previous generations have ever enjoyed.

Answer 117

- changes in birth rates | - migration

Answer 118

Fertility rates in Europe, including the UK, are falling and people are having fewer children than they used to. Research from the Office for National Statistics (ONS) in the UK found that, by 2009, women born in 1964 had an average of only 1.9 children, while the average among their mothers’ generation (women born in 1937) had been 2.4 children. With 20 per cent of those women born in 1964 remaining childless (compared with 12 per cent among those born in 1937), the figure is too low to maintain a stable population size.

Answer 119

Net migration into the UK (ie those relocating into the country from elsewhere) may mean that the population will not actually fall as changes in the birth rate suggest. UK government statistics show that, since the late 1990s, net international migration into the UK from abroad has been an increasingly important factor in population growth. During 2007, net migration – ie the number of foreign people coming to live in the UK less the number of people leaving the country to live abroad – contributed to just over half of the annual population increase. In August 2020, the ONS stated that net UK migration in the year to March 2020 was 313,000. Around 403,000 people emigrated from the UK and the number of migrants entering the country grew to about 715,000.

Answer 120

The impact that these factors (change in the demographics) have on individuals and their implications for sustainable personal financial planning are complex, and emerge over a long period of time. The following are, however, some of the likely effects. ◆Most mothers now go out to work, and this affects the financial products and services that they need. There are already several independent financial adviser (IFA) practices that are run and staffed mainly by women, specialising in dealing with the needs of women in modern society. ◆Because people have smaller families, they can spend more on each child. Children and teenagers now consume many goods and services, and have income from pocket money and part-time jobs. Not only do they need specialised bank accounts and savings products, designed to meet their needs and requirements, but also – and most importantly – they need to be offered an effective financial education, so that they understand how to use personal budgets and cash-flow forecasts to plan their finances over the short, medium and long terms.

Answer 121

Technological factors include matters such as increased automation, the rate of technological change and the influence of technology on outsourcing decisions. Technological shifts can affect costs and quality of service, and can lead to product innovation. The financial services industry is directly affected by change in information and communication technologies (ICT). One feature has been increased automation – ie a computer doing something automatically that a person would formerly have done.

Answer 122

The processes that lend themselves to automation are those that are rules-based. The computer is given a set of rules via a software program and processes information or carries out tasks in accordance with those rules. Generally, these are jobs that need no judgement or discretion, although the following points are worth noting. ◆A computer that works to a set of rules can make straightforward decisions based on those rules and it can put borderline cases in a separate list, to be referred to someone who can exercise judgement and make a decision. Credit scoring is an example of an automated way of making decisions about whether or not to lend to someone. A credit scoring system can be set up so that it will refer all borderline declines and acceptances to senior management. The system effectively separates out cases that are clear-cut and indicates a decision on them, while sending complicated cases to a person for a decision. ◆Some computers can ‘learn’, building up experience that helps them to make better decisions in the future, based on what has happened in the past. This sort of technology is of most value where there is a lot of data on which the system can base its experience; the financial services industry is a good example, because it has many millions of customers all using essentially similar products. This type of technology can be of help in developing customer relationship management (CRM) systems and risk management systems.

Answer 123

Financial institutions routinely process masses of information about their customers, including the transactions on their accounts, their balances, etc. This information can be used to detect any deterioration in an account holder’s behaviour long before their account actually becomes overdrawn without permission or before a loan account falls into arrears. Such a system might typically flag up a pattern of declining balances or a situation in which someone’s overdraft gets bigger and is added to earlier each month.

Answer 124

Financial institutions routinely process masses of information about their customers, including the transactions on their accounts, their balances, etc. This information can be used to detect any deterioration in an account holder’s behaviour long before their account actually becomes overdrawn without permission or before a loan account falls into arrears. Such a system might typically flag up a pattern of declining balances or a situation in which someone’s overdraft gets bigger and is added to earlier each month.

Answer 125

Within the finance industry, automation has had the following results. ◆Increasing speed and efficiency – customers are now accustomed to being able to access information about their accounts or about the share markets, updated in real time, 24 hours a day and at very low cost. ◆Less face-to-face advice and sales – as computers take over jobs that used to be carried out by people, there are fewer opportunities for people to discuss their financial needs and plans with an adviser face to face. Your parents may remember having an interview with their local bank manager, but few people have ever met or even spoken on the phone to a bank manager. Some have never even spoken directly to a member of staff.

Answer 126

Technology such as the internet, email and smartphones means that relationships seem less personal nowadays – and yet, in other ways, relationships are closer than before. Providers’ huge information-processing capabilities mean that they amass large amounts of data about existing and potential customers, and form a clear picture of their needs, wants and habits, which can be to the advantage of consumers if it means that they will be offered products and services closely matching those needs and wants.

Answer 127

It is important to remember, the problems of social and financial exclusion , and to be aware of the ‘digital divide’ that is widening between those who are computer literate and have full access to the internet and those who are not and do not. In 2020, the ONS reported that 96 per cent of UK households had access to the internet. This means that around 4 per cent of the UK population did not have everyday access to an internet connection.

Answer 128

There is no denying that the pace of technological development is increasing. E-commerce has changed the face of customer–provider relationships in the last decade, offering an electronic link – as likely now to be via a smartphone or tablet as it is to be via laptop or desktop PC – between supply (the provider) and demand (the customer). Technological factors thus directly determine the ways in which providers sell their products and the ways in which people manage their finances. The computer revolution has also been the single most fundamental factor in the rise and spread of globalisation, and the ever-increasing interdependence of financial providers and markets.

Answer 129

Although there are some scientists and politicians who take a different view, the vast majority of environmental experts believe that the things we do and use every day – the products that we make, the raw materials that we dig out of the ground, the energy that we use in our homes, factories, offices, vehicles, etc – are causing serious problems for the long-term sustainability of the environment. Waste products from production processes and from the consumption of goods can cause pollution; waste heat and ‘greenhouse gas’ emissions contribute to global warming, which causes damaging climate change including melting ice caps and rising sea levels; rain forests are being destroyed, and we are using up non-renewable sources of energy and other natural resources.

Answer 130

Environmental factors must be considered in relation to sustainable personal finances because, whether or not individual consumers are themselves concerned about the environment, the financial products and services that they buy will inevitably have an environmental impact. Financial services providers are being encouraged by regulators, government and non-government agencies, environmental campaigners and pressure groups, among others, to make their products more environmentally friendly. Banks, for example, are under pressure to make loans available on favourable terms to companies that invest in developing green technology and not to lend money to those companies whose products or production processes are non-sustainable. Insurance companies, similarly, can make a difference by charging lower premiums to people with more fuel-efficient cars and / or cars with lower carbon emissions. Investment bankers, and pension fund and insurance fund managers, are also being asked to consider the environmental records of the companies in which they invest.

Answer 131

Some have argued that it is too easy for companies to adopt so-called ‘greenwashing’ policies – ie to mask their products with ‘green’ (environmentally friendly) window dressing, when in truth they are only paying lip service to environmental issues. Critics complain that, by making their products green, providers face higher costs and will have to pass those costs on to consumers in the form of higher prices, and that investing in green companies will not necessarily secure the best returns for investment fund clients.

Answer 132

In addition to legislation there are other legal factors that can have an impact on providers and consumers of financial products and services. These include laws relating to discrimination, consumer protection, employment, and health and safety. All of these laws can affect how a financial company operates, its costs and the prices that it charges for its products. They can also, both directly and indirectly, affect individual demand for financial services products.

Answer 133

Financial providers wanting to set up in business need to ensure that they can comply with all applicable laws before they do so and, in particular, with financial legislation, such as the Financial Services and Markets Act 2000, the Consumer Credit Acts 1974 and 2006, the Banking Act 2009 and the Financial Services Act 2012.

Answer 134

The Banking Act 2009 established a permanent statutory regime for dealing with failing banks and makes new provisions for the governance of the Bank of England.

Answer 135

The Financial Services Act 2012 amends the Bank of England Act 1998, the Financial Services and Markets Act 2000, and the Banking Act 2009. It also includes other provisions about financial services and markets.

Answer 136

In addition to financial acts, companies must comply with the following legal requirements. ◆Company law – this covers many aspects of how companies are set up and run, and how they report on their affairs. There is also partnership law for those businesses that operate as partnerships. ◆Employment legislation – this sets out rules on how employers must treat their workers and what rights the workers have. ◆Tax laws – these govern the taxes that individuals and businesses must pay, and how they are calculated. ◆Proceeds of crime and anti-terrorism legislation – these laws aim to stop criminals from laundering money (ie from using financial services to hide the proceeds of crimes), and to stop terrorists from using financial services to collect and move their funds around. ◆Accounting standards – financial services providers must draw up their annual financial statements in accordance with International Accounting Standards (IASs).

Answer 137

As consumers of financial products and services, individuals are also protected by more generic consumer protection laws that give them rights, for example, to return faulty goods to the shop from which they bought them and get a full refund.

Answer 138

The primary and secondary legislation (Acts and regulations, respectively) that are relevant in the context of financial services include: ◆the Courts and Legal Services Act 1990; ◆the Competition Act 1998; ◆the Consumer Credit Acts 1974 and 2006; ◆the Consumer Protection from Unfair Trading Regulations 2008; ◆the Consumer Protection (Distance Selling) Regulations 2000 (known simply as the ‘Distance Selling Regulations’); ◆the Enterprise Act 2002; ◆the Estate Agents Act 1979; ◆the Financial Services and Markets Act 2000; ◆the Sale of Goods Acts 1979 and 2002; ◆the Transport Acts 2000 and 2001; ◆the Unfair Terms in Consumer Contracts Regulations 1999 (often abbreviated as the UTCCR 1999); ◆the Consumer Rights Act 2015; ◆the Finance Act 2016.

Answer 139

Until April 2014, the Office of Fair Trading (OFT) and the Competition Commission were the government agencies responsible for enforcing the relevant consumer protection provisions. On 31 March 2014, both of these bodies closed and their responsibilities in this regard were divided between the Financial Conduct Authority (FCA) and a new agency: the Competition and Markets Authority (CMA). This change was brought about under the Enterprise and Regulatory Reform Act 2013.

Answer 140

The CMA is responsible for: ◆ investigating mergers which could restrict competition; ◆ conducting market studies and investigations where there may be competition and consumer problems; ◆ investigating where there may be breaches of UK or EU [competition laws]; ◆ bringing criminal proceedings against individuals who commit [an offence]; ◆ enforcing consumer protection legislation to tackle practices and market conditions that make it difficult for consumers to exercise choice; ◆ co-operating with sector regulators and encouraging them to use their competition powers; ◆ considering regulatory references and appeals.

Answer 141

The area of responsibility that most directly affects consumers is the enforcement of the consumer protection provisions contained in the Consumer Protection from Unfair Trading Regulations 2008. These address practices and market conditions that make it difficult for consumers to choose the products that will best suit their needs and requirements. The work of the CMA includes investigating individual cases in which consumers have suffered because of a lack of effective competition in the market for a particular product or service.

Answer 142

If consumers have been sold a financial product or service in breach of the provisions of the Distance Selling Regulations (which regulate the sale of goods and service via the internet) or the Consumer Rights Act, they can take advantage of complaints procedures and ‘cooling-off’ periods during which they are entitled to change their minds about purchases; their local trading standards office will also take up any individual cases of bad practice and take steps to resolve the problem. This regime of consumer protection is, of course, additional to that specifically provided for consumers of financial services by the Financial Services Compensation Scheme (FSCS), the Financial Conduct Authority (FCA) and the Financial Ombudsman (FOS). If all else fails, consumers also have the option of bringing a civil action against a provider. When a court case between a customer and a financial services provider goes against the provider, other customers who have similar cases are likely also to take it to court: the first decision will establish judicial authority, which means that the court actions of other dissatisfied customers will have a greater chance of success.

Answer 143

The need for legal regulation of financial services was demonstrated by the problems that occurred as a result of changes in the law in the 1980s, which swept away many of the regulations that had until then prevented financial services providers from widening the range of products and services that they could offer. Before this deregulation, building societies, for example, had been limited to providing only mortgage lending and savings accounts, while banks supplied shorter-term loans and current accounts – and the two were not to cross into each other’s marketplace in that regard. Building societies were also not allowed to borrow money on the money markets to fund their mortgage loans; the money with which building societies provided mortgages was the money that savers had deposited with the organisations.

Answer 144

Before deregulation, building societies, had been limited to providing only mortgage lending and savings accounts, while banks supplied shorter-term loans and current accounts – and the two were not to cross into each other’s marketplace in that regard. Building societies were also not allowed to borrow money on the money markets to fund their mortgage loans; the money with which building societies provided mortgages was the money that savers had deposited with the organisations. Deregulation freed these two types of firm from many of the legal constraints that stopped them from competing in similar areas. Most of the big building societies took the opportunity to convert from mutual organisations to banks (an exception being Nationwide). In today’s financial services marketplace, there is very little difference between the ranges of services that banks and building societies offer: both provide mortgages, loans, savings accounts and current accounts, along with an increasingly diverse range of other products and service.

Answer 145

Generally speaking, deregulation allowed increased competition, this is seen to be a good thing, because it helps to ensure that prices are kept as low as possible. After the global financial crisis of 2007–08, however, high-profile cases of mis-selling financial products and fixing interest rates came to light – and were considered to be the consequences of deregulation. Many economists and politicians now believe that too many building societies gave up their mutual status to become banks, and also that it was deregulation that permitted banks to develop certain poor practices – particularly aggressive sales techniques and expansions in high-risk investment banking activities – that contributed to the crisis.

Answer 146

The new legislation and new regulatory system brought in under the Banking Act 2009 and the Financial Services Act 2012 can be seen as an acceptance by government that deregulation was damaging – that individual consumers will suffer if banks and other financial services providers are not properly and effectively regulated.

Answer 147

Membership of the European Union also has implications for a country’s legislation, because the institution itself makes laws. These take the form of either regulations or directives, and they have to be applied in all of the member countries.

Answer 148

Regulations are directly applicable in member countries. This means that they become law in all EU member countries as soon as they come into force, and that people and businesses must comply with them immediately. Such regulations apply to all EU members equally, with no variation of the law from one country to another.

Answer 149

Directives can be seen as instructions issued by the European Commission to the governments of the EU member countries. Each member has to enact its own laws to meet the requirements of the directive within a set period (usually two years). The exact rules can differ from one member country to another, as long as they fulfil the requirements of the directive. In other words, the directive sets out what is to be achieved and the member country can decide for itself how to achieve it. There can be differences in how quickly each member country brings a directive into force, but they should result in a set of minimum standards being established across all EU member states.

Answer 150

European Union - Splits into regulations and directives - Regulations go straight into UK legislation - Directives go through domestic legislation - Domestic legislation is then implemented into UK legislation

Answer 151

A huge number of UK laws have originated in the European Union, eg the Data Protection Act 1998 and the Consumer Credit Act 2006. In December 2010, the deposit compensation limit for the UK (payable through the FSCS) was changed; this too was the result of European intervention – the equivalent in pounds sterling of the euro deposit compensation limit agreed for all members of the European Economic Area (EEA), which includes EU member states plus several other European countries, such as Iceland, Liechtenstein and Norway.

Answer 152

On 25 May 2018, the General Data Protection Regulation took effect. In the UK it superseded (took the place of) the Data Protection Act 1998 with the creation of the Data Protection Act 2018, and at least some of its provisions will continue to apply after Brexit to organisations that collect the data of EU citizens.

Answer 153

European law particularly affects the financial services industry because the EU is trying to harmonise financial services regulation, with the aim of safeguarding the rights of individual consumers of financial services. The objective is to create a single European market for financial services in which people living in one EU member country can confidently buy financial products and services from a provider in another EU member country, secure in the knowledge that providers are regulated and supervised to the same standard across the Union. The European Commission consequently plans to bring into force a huge number of laws and directives over the next few years. Despite Brexit, this may affect UK financial services businesses that deal with customers in the EU.

Answer 154

This planned legislation (creating a single European market for financial services in which people living in one EU member country can confidently buy financial products and services from a provider in another EU member country) will naturally mean increased competitive pressure as European banks, insurance and investment companies enter the UK marketplace – and this should be to the benefit of UK consumers, who will have more products and services from which to choose.

Answer 155

PESTEL factors are quantifiable – ie their values can be measured, and differences or changes in those values can be recorded and analysed. Data on interest rates, levels of inflation or unemployment, house ownership, budget deficits and debts are just some of the social and economic variables that can be measured and presented in tables, graphs, histograms, bar charts and pie charts, etc. In the UK, huge amounts of these statistical facts and figures are collected and collated every day by the Office for National Statistics (ONS) and published in a variety of forms. This allows us to present data, consider how best to analyse that data and draw appropriate conclusions.

Answer 156

- Tables - Graphs - Bar charts - Pie charts

Answer 157

Refer to pages 105 - 108 to see how data can be presented and analysed in different ways.

Unit 3 Topic 3 Flashcards

(181 cards)