Topic 8 - Consumer Protection

Question 1

Organisations that provide consumer protection in UK financial services market

Answer 1

• regulators: financial conduct authority (FCA), prudential regulation authority (PRA)
• financial ombudsman service
• financial services compensation scheme (FSCS)
• competition and markets authority

Question 2

What is the credit crunch

Answer 2

• global financial crises of 2007

Question 3

What are the causes of the credit crunch?

Answer 3

• banks lent money to ppl unlikely to repay
• banks used money from their retail businesses to pay losses from their investment operations
  
  • providers: not enough money to repay depositors when retail customers wanted to withdraw money
• UK market dominated by large banking organisations ‘too big to fail’

Question 4

How is banks lending money to ppl unlikely to repay a cause of the credit crunch?

Answer 4

• in early 2000s, US interest rates low: lenders lent mortgages to sub-prime market
• lenders sold on this debt to other providers
• interest rates inc. + many sub-prime customers couldn’t make mortgage repayments, so banks sold homes dec. house prices
• house prices < mortgage owed to bank: banks stopped lending money to other banks + so many banks made losses + couldn’t access cash

Question 5

Key recommendations of the independent commission on banking

Answer 5

• improve regulation of providers
• make sure banks are able to absorb losses
• make it easier + less costly to deal w banks in financial trouble
• reduce amount of risk banks take
• separate retail banking from investment banking

Question 6

What main changes does the financial services bill include?

Answer 6

• UK banks must separate everyday + more risky investment banking activities (ring-fencing)
• depositors covered by FSCS must be repaid as priority if bank fails
• gov. will have powers ensuring banks can absorb losses more easily

Question 7

What is regulation?

Answer 7

• process of supervising actions + businesses of financial services providers

Question 8

What is the financial policy committee (FPC)?

Answer 8

• part of Bank of England
• focuses on major risks within financial system as a whole

Question 9

What is the role of PRA?

Answer 9

• responsible for prudential regulation of banks, building societies, credit unions, insurers + investment

Question 10

What are the 2 objectives of the PRA?

Answer 10

• promote safety + soundness of providers
  
  • providers better able to cope in a crisis + can support economy (if provider fails)
• secure appropriate degree of protection for insurance policyholders

Question 11

What are PRAs set standards + requirements providers must meet?

Answer 11

• holding enough cash + having enough capital to absorb certain levels of losses
• having suitable management
• bring fit + proper
• conducting business prudently

Question 12

Why is PRA forward looking?

Answer 12

• assess level of risk in future
• can take action so providers reduce risk
  
  • require banks to hold more capital
  • order providers to change lending criteria

Question 13

What does the FCA do?

Answer 13

• aims to prevent misconduct by financial services providers

Question 14

FCA enforcement powers to providers that have broken rules

Answer 14

• imposing fines on providers/individuals
• withdrawing/suspending a provider’s authorisations to operate
• ordering providers to compensate customers

Question 15

What are the 2 ways FCA manage risk?

Answer 15

• investigates individual or linked providers
• investigates themes or issues in the market

Question 16

What are the 3 ways the FCA ensure financial markets work well so customers get a fair deal?

Answer 16

• ensure customers are protected
• protect + enhance integrity of UK financial system
• promote effective competition in the interests of customers

Question 17

Why was the FOS set up?

Answer 17

• to resolve individual complaints from customers
• free to customers

Question 18

What does the FOS do?

Answer 18

• considers both sides of every complaint
• can order providers to pay compensation to customers up to a specific max. depending on when case was brought to FOS

Question 19

What is the FSCS?

Answer 19

• repays customers deposits in providers authorised by FCA
• funded by levies on regulated providers
• deposits covered to max. £85,000 per person per provider

Question 20

What does the competition + markets authority (CMA) do?

Answer 20

• ensures market works well for customers, businesses + the economy

Question 21

What is the CMA responsible for?

Answer 21

• investigating mergers that could restrict comp
• conducting market studies + investigations: where comp + consumer problems
• bringing criminal proceedings against businesses + individuals taking part in cartels
• enforcing consumer protection legislation to tackle practices + market conditions
• cooperating w gov. + sector regulators + encouraging them to use comp powers

Question 22

Voluntary codes of conduct

Answer 22

• consumer protection: providers regulate themselves by agreeing to it
• includes financial providers setting up voluntary rules they adhere to
• e.g. Standards of Lending Practice - covers good practice