Module 14 - Financial Services Sector

Question 1

Commercial bank

Answer 1

Usually ltd companies that collects deposits from individuals and companies and lends money to them when they wish to borrow money - go between for those who have extra money and those who are short on funds

Question 2

Financial intermediation

Answer 2

Pooling funds from different sources and using these funds to provide loans and make investments

Question 3

Building society

Answer 3

operate in a similar manner to a bank but have no external shareholders: borrowers and lenders are members who vote on how the society is run

Question 4

NS&I

Answer 4

takes deposits from HM Treasury but is not a bank and doesn’t provide lending services

Question 5

peer-to-peer lending

Answer 5

Borrow money directly from investors - usually cheaper than going through a bank

Question 6

Investment banks

Answer 6

• provide advice to corporate customers who want to raise finance and assist in the issue of securities
• managing corporate M&A
• buying and selling shares and bonds on behalf of both corporate and private customers

Question 7

Securitisation

Answer 7

takes assets which are illiquid and pools them together and transforms them in to a more liquid security e.g. MBS

Question 8

What does the underwriter do in an insurance company

Answer 8

Assesses the risks and quotes the premium

Question 9

When is an insurance business viable

Answer 9

As long as the total premiums received is more than the claims paid out

Question 10

What do insurance companies do with the premiums

Answer 10

They are steady, predictable inflows of cash which are invested by the insurance company with the aim of providing the maximum possible return balanced with the need to be able to pay out when required

Question 11

What are the two general categories of insurance

Answer 11

1. general

2. long-term savings and life insurance

Question 12

What is life insurance vs life assurance

Answer 12

Life insurance is fixed term whereas life assurance is not for a fixed term

Question 13

Term insurance

Answer 13

An individual’s life is insured for a specific period or term

Question 14

Whole of life policies

Answer 14

A capital sum will be paid upon the death of the policyholder - can be used to meet inheritance tax liabilities

Question 15

Endowment policies

Answer 15

Combining life insurance and savings

Question 16

Investment management

Answer 16

Involves the investment of a client’s assets to meet pre-determined objectives - usually to either maximise returns or to match liabilities

Question 17

Collective investment schemes

Answer 17

Large funds which can be invested in on behalf of investor by professional fund managers

Question 18

Adv of collective investment schemes

Answer 18

• can invest small amounts regularly
• funds managed by professional
• pooling allows purchases at lower costs
• risk reduced by diversification
• no CGT when a fund trades in shares
• exposure to foreign stocks
• specialisation possible

Question 19

Disadv of collective investment schemes

Answer 19

• cannot choose investments
• management is less certain
• larger funds find it difficult to invest in shares with small capitalisation
• layer of charges payable

Question 20

What are the three alternative investment management styles that may be adopted

Answer 20

active
passive
hybrid

Question 21

active management

Answer 21

changes portfolio on regular basis attempting to improve returns of funds

• do not believe in efficient market hypothesis

Question 22

passive management

Answer 22

believe in efficient market hypothesis so design their funds to mirror specific indices

Question 23

hybrid management

Answer 23

try to outperform indices rather than track them - mix of active and passive

Question 24

collective funds may be either ____

Answer 24

onshore or offshore

Question 25

Three forms of onshore funds

Answer 25

- unit trusts - open-ended investment companies - investment trusts

Question 26

Unit trusts

Answer 26

- investor's holdings in units - monitored by trustees - open-ended - pricing is at valuation point - dual price - no stock exchange listing - charges set out in trust deed

Question 27

Open-ended investment companies

Answer 27

- company structure - shares - depositary looks after funds which must be independent - dual pricing but usually single price - valuation point for pricing - listing is optional

Question 28

Investment trusts

Answer 28

- plc - listed on stock exchange - closed ended (fixed amount of shares) - more flexibility in gearing/ risk - single price - real time pricing

Question 29

NAV

Answer 29

net assets attributable to OS / number of ordinary shares in issue

Question 30

which type of funds are priced based on the NAV

Answer 30

- unit trusts | - OEIC

Question 31

Monetary stability

Answer 31

Prices are stable and confidence in local currency - stable prices defined by inflation target

Question 32

Financial stability

Answer 32

detecting and reducing threats to the financial system as a whole

Question 33

FPC

Answer 33

- committee of BoE - looks for risks and weaknesses in the financial system - 13 expert members (6 from BoE) who meet quarterly at times of crisis tools: - setting minimal capital requirement for banks to hold - set limits on gearing levels of banks - setting limits on borrowing - using regs to set limits on lending

Question 34

PRA

Answer 34

- part of BoE - prudential regulation and supervision of banks etc - monitoring adequacy of internal systems and controls three objectives: 1. safety and soundness of firm it regulated 2. contribute to the securing of appropriate degree of protection for insurance policy holders 3. facilitate effective competition between firms

Question 35

What is the main difference between PRA and FPC

Answer 35

FPC looks at financial system as a whole whereas PRA focuses at firm level

Question 36

FCA

Answer 36

- independent public body - accountable to treasury - purpose defined by FS and Markets act 2000 objectives: 1. secure an appropriate degree of protection for consumers 2. protect and enhance integrity of UK financial system 3. promote effective competition in the interests of consumers

Question 37

Four of the FCAs key responsibilities

Answer 37

1. conduct regulator 2. prudential regulation 3. admission to LSE - tackling financial crime

Question 38

Regulated activies:

Answer 38

- entering into a regulated credit agreement as a lender - debt collection - advising on or managing investments etc

Question 39

Exemptions from the requirement to be authorised by FCA

Answer 39

1. professional firms e.g. solicitors, accountants, actuaries 2. firms offering payments by instalments 3. appointed representatives working on behalf of firms that are already authorised

Question 40

What makes up the ESFS

Answer 40

- ESRB - EBA - ESMA - EIOPA

Question 41

City Fraud

Answer 41

Wrongful or criminal deception intended to result in financial or personal gain - involves dishonesty, misrep and legally recognised harm

Question 42

In terms of money laundering regulations all relevant businesses must:

Answer 42

- conduct a money laundering and terrorist financing written risk assessment - have an appropriate anti-ML and terrorist financing systems in place

Question 43

The Bribery act 2010

Answer 43

Increases max jail term by an individual from 7 to 10 years and an unlimited fine for a company four offences: - paying bribes - receiving bribes - bribery of foreign public officials - failure of commercial organisations to prevent bribery