Key function of banks and building societies?
To keep people’s
money safe yet easily accessible
What are the four essential functions of the financial services industry?
- Protecting and channeling individual savings into capital management
- Matching savers’ desire for access to money with borrowers’ needs for long-term funds
- Providing insurance against risks
- Allowing investors to spread risk across different investment products
These functions facilitate the flow of money and risk management in the economy.
What is the primary role of banks and building societies regarding short-term savings?
- Keeping money safe and accessible
- Lending out deposited money to borrowers
- Generating profit through interest on loans
Banks benefit from the relationship by using deposited money to make returns for themselves.
True or false: If a building society converts to a bank, it retains its mutual status.
FALSE
This process is known as ‘demutualisation’, and members usually benefit from a windfall.
What are gilts in the context of government financial instruments?
- Loans from bondholders to the UK Government
- Fixed-interest securities issued by the Government
- Conventional gilts promise fixed coupon payments
They are a major part of UK Government debt.
What is the difference between conventional gilts and index-linked gilts?
- Conventional gilts: Fixed coupon payments
- Index-linked gilts: Adjusted payments for inflation
Index-linked gilts provide protection against inflation.
What is the purpose of insurance and risk management?
- Protecting policyholders from financial loss
- Safeguarding against damage to assets
This applies to both individuals and companies.
List three types of assets that individuals and companies may insure.
- Physical assets (e.g., property)
- Earnings
- Profit potential
Insurance helps mitigate financial risks associated with these assets.
What is a capital market?
A financial market where bonds and equities are bought and sold
It facilitates long-term investments and capital raising.
What are the two key objectives of capital markets?
- Allowing investors to invest in assets for real growth
- Enabling companies and governments to raise money without bank loans
These objectives drive the development of financial instruments.
What are the differences between shares and bonds?
- Shares: Ownership in a company, potential dividends, voting rights
- Bonds: Loans to governments or companies, fixed interest, capital repayment
Shares carry higher risk, while bonds are generally considered safer.
Most private individuals access bonds and shares indirectly through collective investment schemes such as _______.
unit trusts, open-ended investment companies (OEICs), personal pensions
These schemes allow for diversified investment without direct ownership.
What are the major institutions and organisations in the UK financial services industry?
- Money markets
- Capital markets
- Commodity markets
- Foreign exchange (FX) markets
- Insurance companies
- Investment companies
- Life insurance and pension companies
- Reinsurance companies
- Investment houses
These institutions play a role in the financial markets and are interconnected within the UK financial services industry.
What are the core services offered by banks and building societies?
- Current accounts
- Deposit accounts
- Mortgages and loans
Core services are essential for customers and include flexible access to funds and financing options.
True or false: Friendly societies were established as mutual self-help groups with shareholders taking profits.
FALSE
Friendly societies operate without shareholders, returning profits to members.
What is the role of the UK Government in the financial services industry?
Regulation of the financial services market
The UK Government, primarily through the Treasury, oversees the regulation and conduct of the financial services industry.
What are the two main regulatory bodies in the UK financial services industry?
- Prudential Regulation Authority (PRA)
- Financial Conduct Authority (FCA)
The PRA focuses on prudential regulation, while the FCA handles conduct and market responsibilities.
Fill in the blank: The Financial Services and Markets Act 2000 (FSMA) governs the regulation and conduct of the financial services industry in the UK, along with the _______.
Financial Services Act 2012
These acts provide the legal framework for financial regulation in the UK.
What are the two types of taxation impacts on the economy?
- Reduces consumer spending and business investment (high taxation)
- Stimulates economic activity (low taxation)
Taxation influences both individual and business financial behavior, affecting overall economic growth.
What are the two main components of economic policy?
- Fiscal policy
- Monetary policy
Fiscal policy involves taxation and government spending, while monetary policy focuses on interest rates and money supply.
What is the Monetary Policy Committee (MPC) responsible for?
Setting short-term interest rates
The MPC aims to meet the Chancellor’s inflation target and influences overall economic conditions.
What happens when interest rates decrease?
- Prices of bonds and property tend to rise
- Increased borrowing and spending
- Stimulates demand in the economy
Lower interest rates generally encourage economic activity.
What is quantitative easing (QE)?
A method to increase the money supply and stimulate the economy
QE involves the Bank of England purchasing financial assets to inject liquidity into the economy.
What does QE stand for in the context of the Bank of England’s monetary policy?
Quantitative Easing
QE involves the Bank of England buying back gilts and corporate bonds to inject liquidity into the financial system.
