Chapter 1 - UK financial services industry in its european and global context Flashcards
Describe the role, structure and context of the UK and international financial services and markets Explain the function and operation of financial services within the economy Describe the role of government and the impact of the EU on UK regulation (18 cards)
1.1 Function & operation of financial services within the wider economy
what are the 4 essential functions of financial services?
Financial Services are said to perform four essential functions
- provide acces to, and protect, consumers’ savings
- allow savings to be lent to others, to meet borrowing needs of consumers
- provide protection against risks e.g. death and adverse health
- Disperse Risk, by investment into many different products
these functions are made possible by the different elements that make up the financial services market
1.1.1 Short-term savings
where and why do consumers deposit their savings?
why do banks & building societies lend savings to other consumers?
what do companies do with these savings?
what do consumers, providers and companies gain?
consumers deposit their savings into bank and building societies in return for interest. savers are generally looking for for ready access to their capital.
bank/building societies then lend thesse savings out to other consumers, so matching borrower requirements for long-term funds
companies can also invest these monies (greater risk = greater return) for the consumer and for themselves
main role that deposit-holders play is to provide funds for lending purposes
1.1.1 Short-term savings
who owns banks?
Banks are owned by their shareholders, shareholders expect dividends from their investments
1.1.1 Short-term savings
who owns building societies?
Building Societies are owned by their share account savers these savers should recieve higher rates on accounts and lowers interest loan charges, this is their way of sharing in any profits
1.1.1 Short-term savings
banks and building societies convert short-term savings into…
long-term lending
1.1.1 Short-term savings
what is a proprietary company?
a bank that is owned by its shareholders
1.1.1 Short-term savings
what is a mutual organisation?
a building society that is owned by its savers
1.1.1 Short-term savings
why do accounts offfered by a mutual company are more likely to have higher rates of interest thatn through a propietary company?
a mutual company has no shareholders to keep happy, therefore it can offer higher interest rates to its members
1.1.2 Government Savings
What is the Bank of England?
the bank of england is the governments ‘own’ bank, this is a financial institution in its own right
1.1.2 Government Savings
the UK government can raise money to fund public spending through…
if looked at from the publics perspective
… methods of government borrowing or government saving (if looked at through the publics perspective, which are:
**GILTS (Government invested, long term savings) **- these are loans to the bank of england that pay a fixe lvel of annnual interest over a term. at the end of the term, hte original capital is returned to the investor
NS&I (National Savings and Investments) - which offers a range of deposit-based savings
1.1.2 Government Savings
what is a public-sector net cash requirement?
give an explanation and example
think of government surplus and defecit (post COVID pandemic)
a public-sector net cash requirement? is another term for a government defecit
government money in - through taxation
government money out - through state benefits
e.g. when there is more money spent on state benefits than what is coming in through taxation, this is a government defecit which is also known as a public-sector net cash requirement
1.1.2 Government Savings
how do financial services companies help reduce government borrowing?
By investing in GILTS (government invested, long term savings)
this increases the amount of money that is lent to the government (usually for a set period) - this means that governments need to borrow less through other methods, such as on money markets
1.1.3 Insurance and risk management
the prinicipal of insurance and risk-management is to…
…is to safeguard assets from financial loss.
once of the essential functions of financial services is to provide protection against risk
1.1.3 Insurance and risk management
what sort of assets would individuals and companies want to protect? how do they do this?
everyone wants to protect assets such as themselves, their property, their income or profits, or their financial transaction
this is done through life assurance, income protection and ‘key’ person cover for businesses
1.1.3 Insurance and risk management
why do insurance providers ‘pool together’ the many small premiums they recieve from consumers?
insurance providers ‘pool together’ the many small premiums they recieve from consumers to grow their reserves - this is simillar to how banks and building societies use the money from savers to lend out mortgages
1.1.3 Insurance and risk management
what is a reinsurance company?
Lloyds of London is a good example of this
this needs reviewing at a later date
some risks are too large for the mainstream financsial services providewrs that origianlly accept the insurance - as a result they oftem seek to insure themselves against the risk of a claim through the use of a reinsurance company
When an insurance company sells a policy — for example, insuring a huge skyscraper or a major airline — the risk can be enormous. If something bad happens (like a massive fire or accident), the payout could be way bigger than the insurer can easily afford.
Rather than taking on all that risk themselves, the insurer can buy reinsurance.
This means they pay a reinsurance company to cover part of the risk. So if a big claim comes in, the reinsurer will pay part (or even most) of the bill.
In short:
* Insurance companies sell insurance to people and businesses.
* Reinsurance companies sell insurance to the insurers themselves.
It’s like the insurer saying, “This is too much for me to handle alone — let me spread the risk with someone else.”
the risks of financial transactions are much more complex to protect against
here we are talking about risks such as selling assets, which might go up in value or buying assets which might go down in value
managers of investments can use financial instruments called derivatives to offset such losses or manage risk
1.1.4 Longer term investment and capital markets
the stock market is an example of a financial market Financial markets have developed to meet 2 key objectives, which are?
- provide acces to investments that can combat inflation (known as real growth)
- provide a way for companies to raise moeny, other than borrowing from a bank
1.1.4 Longer term investment and capital markets
the stock market was born to predominantly to…
(give examples)
facilitate the trading of stocks and shares - the stock market also allows institutions to invest and offer thei own collective investments, such as unit trusts and pensions
Stocks
* also referred to as bonds - GILTS are an example of a bond (bonds are a widely used financial term so be carefult of what context its being used in)
* allows the investor to lend a company money in excahnge for a fixed term payment
Shares
* the investor buys a share of the company - the consumer shares in the company’s growth and profits via dividends
