Chapter 1 (The Financial Services Sector)

Question 1

What is the primary difference between retail and professional businesses in the financial sector?

Answer 1

Retail businesses serve personal customers (B2C), while professional businesses (wholesale) serve other businesses (B2B).

Question 2

What is another term for the professional or wholesale financial sector?

Answer 2

The professional sector is also referred to as the institutional sector.

Question 3

Who are the clients of retail businesses in financial services?

Answer 3

Retail businesses serve personal customers or individuals.

Question 4

Who are the clients of professional businesses in financial services?

Answer 4

Professional businesses serve other businesses or institutions, such as asset managers, insurers, and banks.

Question 5

Name four key markets that make up the professional sector.

Answer 5

Equity markets, bond markets, foreign exchange (forex) markets, and derivatives markets.

Question 6

What financial activities are included in retail banking?

Answer 6

Retail banking includes current accounts, deposit accounts, lending, and credit cards.

Question 7

What services are typically provided by retail investment services?

Answer 7

Retail investment services provide access to equities, bonds, currencies, derivatives, and funds for individuals.

Question 8

What is the focus of financial planning and advice in the retail sector?

Answer 8

Helping individuals understand and plan for their financial future.

Question 9

What is the main function of equity markets?

Answer 9

Facilitating the trading of shares in quoted or listed companies.

Question 10

Who are the main participants in equity markets?

Answer 10

Institutional investors, such as asset managers and insurance companies, as well as individual investors.

Question 11

How do professional businesses typically trade equities?

Answer 11

Trades are arranged by brokers or brokers/dealers, often involving banks acting as dealers or market makers.

Question 12

How do bond markets differ from equity markets?

Answer 12

Bond markets are larger, trade primarily OTC (not via exchanges), and involve fewer but larger trades.

Question 13

What entities issue bonds in the bond markets?

Answer 13

Companies, governments, and supranational agencies such as the World Bank.

Question 14

What is the significance of foreign exchange (forex) markets?

Answer 14

Forex markets are the largest financial markets, with a daily turnover of around $7.5 trillion (as of 2022).

Question 15

How is trading conducted in forex markets?

Answer 15

Forex trading is conducted over-the-counter (OTC) without a central exchange, through brokers and dealers.

Question 16

Which country is the main global center for foreign exchange transactions?

Answer 16

The UK is the main global center for foreign exchange transactions.

Question 17

What drives currency exchange rates in forex markets?

Answer 17

Supply and demand, such as strong demand for assets denominated in a particular currency.

Question 18

What is the role of technology in modern forex trading?

Answer 18

Technology has enabled the growth of electronic trading, remittance companies, and fintechs alongside traditional banks.

Question 19

What primary services do retail banks provide?

Answer 19

Retail banks provide deposit-taking, lending, payment, and money transmission services.

Question 20

How have retail banks adapted their operations in recent years?

Answer 20

Retail banks have increasingly shifted from physical branches to internet- and app-based services.

Question 21

What additional financial products might larger retail banks offer?

Answer 21

Larger retail banks may offer mortgages, investments, pensions, and insurance.

Question 22

What is the primary role of pension funds in the financial services sector?

Answer 22

Pension funds help individuals make provisions for retirement through employer-provided or self-directed schemes.

Question 23

In what types of assets do pension funds typically invest?

Answer 23

Pension funds invest in shares, bonds, cash, and sometimes physical assets like property.

Question 24

How do insurance companies help manage risks?

Answer 24

Insurance companies provide life and general insurance products to cover risks such as death, accidents, and theft.

Question 25

What are some examples of general insurance products?

Answer 25

Examples include motor insurance, household insurance, and fleet insurance.

Question 26

How do insurance companies use premiums collected from clients?

Answer 26

Premiums are invested in shares and bonds, making the insurance industry a major stock market participant.

Question 27

What is the role of investment services in the retail financial sector?

Answer 27

Investment services help individuals select, buy, and manage financial assets like shares and bonds.

Question 28

What are 'execution-only' brokers, and how do they differ from other brokers?

Answer 28

Execution-only brokers offer trading services without advice and earn profits from commissions or bid-ask spreads.

Question 29

What is a robo-advisor in the context of investment services?

Answer 29

A robo-advisor uses algorithms to provide automated investment advice and portfolio management at low fees.

Question 30

What additional services do wealth managers provide beyond investment advice?

Answer 30

Wealth managers consider the client's overall financial situation, offering services like custody, portfolio management, and financial planning.

Question 31

What is financial planning, and how does it differ from investment management?

Answer 31

Financial planning involves organizing a client’s financial affairs, covering budgeting, retirement planning, risk management, tax planning, and estate planning, beyond just managing investments.

Question 32

What are the core topics addressed by financial planning?

Answer 32

Core topics include financial management, budgeting, retirement planning, risk management, insurance, tax planning, and estate planning.

Question 33

What is the role of a fiduciary in financial planning?

Answer 33

A fiduciary acts on behalf of clients, prioritizing their interests ahead of their own, and is both ethically and legally bound to maintain trust and good faith.

Question 34

How do financial planners typically charge for their services?

Answer 34

Financial planners may charge a flat fee for developing a plan or earn commissions from selling recommended securities.

Question 35

What is the primary role of investment banks in the financial services markets?

Answer 35

Investment banks provide advice and arrange finance for companies looking to list on stock markets, raise funds through shares or bonds, and execute mergers and acquisitions.

Question 36

What types of services are typically offered by investment banking groups?

Answer 36

Services include corporate finance and advisory work, treasury dealing, securities trading, investment management, and the creation of structured products.

Question 37

What is 'corporate finance and advisory work' in the context of investment banking?

Answer 37

It involves helping companies raise finance through new securities, mergers, acquisitions, underwriting, and bookrunning issues.

Question 38

What role do investment banks play for high-net-worth individuals (HNWIs) and sovereign wealth funds (SWFs)?

Answer 38

They provide direct investment management and pooled investment opportunities in collective investment funds.

Question 39

What are fund managers responsible for in the wholesale sector?

Answer 39

Fund managers professionally manage investment portfolios for institutions, such as pension funds, insurance companies, and collective investment schemes.

Question 40

What types of clients do institutional fund managers typically serve?

Answer 40

Institutional fund managers serve large clients like pension funds, insurance companies, and corporate entities.

Question 41

How do fund managers earn revenue for their services?

Answer 41

Fund managers charge a small percentage of the value of the funds they manage.

Question 42

What is the key distinction between institutional and private client fund managers?

Answer 42

Institutional fund managers handle portfolios for large entities, while private client fund managers work with wealthy individuals.

Question 43

What role do brokers play in the wholesale financial markets?

Answer 43

Brokers arrange trades in financial instruments for clients, such as institutional investors, and generate revenue from commissions or bid-ask spreads.

Question 44

How do brokers in the wholesale sector differ from retail brokers?

Answer 44

Wholesale brokers often handle large trades for institutional clients and may operate as divisions of investment banks.

Question 45

What is the primary function of custodian banks?

Answer 45

Custodian banks provide safe custody services for shares, bonds, and cash on behalf of clients like fund managers and pension funds.

Question 46

List three core activities of custodian banks.

Answer 46

Holding assets in safekeeping, arranging settlement of securities trades, and processing corporate actions such as collecting dividends or bond coupons.

Question 47

Why are custodians important for international markets?

Answer 47

Large custodians maintain international networks, enabling access to foreign markets and facilitating multi-currency transactions.

Question 48

How has competition impacted the custodian banking industry?

Answer 48

Competition has reduced fees for custody services, leading to consolidation and domination by a few global custodians.

Question 49

What types of reporting do custodian banks provide to their clients?

Answer 49

Custodians provide regular reports on activities such as asset holdings, transactions, corporate actions, and cash management.