Financial Services, Regulations and Ethics. Learning Outcome 1

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1 Financial Services, Regulations and Ethics Learning Outcome 1 By the end of this learning outcome you will be able to demonstrate an understanding of the UK financial services industry in its European and Global context. Aviva Financial Adviser Academy v2016

2 1.1 The financial services industry is said to provide four essential functions:- Banks came about because people wanted to keep their money safe and readily accessible. In return the banks make a profit by channelling this money. That is, they invest some of it, in the expectation of making a greater return than they have to give their savers in the form of interest. They also lend some of it, charging a higher rate of interest to borrowers than they pay out to savers, again making a profit. The Government also uses the savings of private individuals to fund its own borrowing via its National Savings & Investments products and the sale of Gilts*. *A Gilt is a Government investment product where the saver invests, for example, 100 and in return receives twice yearly interest payments and their 100 back at the end of the term. Risk management is about protecting assets from damage or loss. It allows individuals and companies to insure against risks e.g. general insurance, life insurance, reinsurance* and derivatives**. *There are some risks that are simply too big to be covered by a single company. Where this is the case, the risk is initially accepted and assessed by an insurance company for a proportion of the premium. This is known as reinsurance. **A derivative is a type of investment where one person agrees to buy an asset from another person at a particular price in the future. The need to invest in assets that provide real growth (that is, in excess of inflation) and for companies to raise money without going to their bank, led to the creation of shares and bonds. A share is a part of a company bought by an investor in the hope that its price will rise over the long term and give them a better return than interest from a bank. A bond is the company equivalent of a Gilt. It is a loan to a company in return for a twice yearly interest payment. All these investments allow investors to spread risk by having different types of assets in their portfolios. This is known as diversification. Aviva Financial Adviser Academy v2016

3 1.2 The table below shows the bodies involved in the regulation of markets in the EU and beyond. If their role is not evident from their title, or you are not certain of what their role is, then use an internet search engine to find out more. European Supervisory Authorities European Banking Authority European Securities and Markets Agency European Insurance and Occupational Pension Authority Global Bodies Financial Stability Board (Oversees global financial system) Financial Action Task Force (Money Laundering) International Organisation of Securities Commissions International Association of Insurance Supervisors Basel Committee on Banking Supervision International Swaps and Derivatives Association The Bond Market Association International Securities Market Association 1.3 The Bank of England oversees the UK Payments System. This includes cash payments, cheque clearing and settlements from stock-exchange transactions and trading systems. For more details on the UK payments system use the link below: The Payments Systems Regulator is the organisation established by FCA that sets strategy for UK payments. It has been established to ensure that UK payment systems and services meet the needs of users, payment service providers and the wider economy. Aviva Financial Adviser Academy v2016

4 The UK is home to two types of stock trading: The customer face of UK financial services is primarily comprised of the banks and building societies, life assurance companies and independent financial advisers. Traditionally banks and building societies offered a number of core services, including current and deposit accounts, mortgages, loans and wills. In order to compete in today s market they are broadening their horizons and also offer a number of indirect services including portfolio management, stockbroking and advising on and selling collective investments, insurance products and pensions. Life assurance companies distribute their products through their own financial advisers and intermediaries. Aviva Financial Adviser Academy v2016

5 There are two main types of advice: 1.4 The Financial Services Action Plan (FSAP) was designed to improve the European single-market for financial services. It instigated a number of laws in the following areas which will impacted the UK: A single market for wholesale financial services Open and secure retail markets State of the art prudential rules and supervision For more details on the FSAP you can go to: es/financial_services_general_framework/l24210_en.htm EU regulations influence how the FCA creates its own policies. 1.5 The Treasury is the Government department responsible for the regulation of financial services in the UK. It reports to the Chancellor of the Exchequer. The UK financial services industry is governed by the Financial Services and Markets Act (FSMA) 2000 and the Financial Services Act 2012, which created two new regulatory authorities: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). 1.6 The PRA is a subsidiary of the Bank of England and is responsible for the prudential supervision of banks, insurers and major investment firms. The PRA aims to enhance financial stability by promoting the safety and soundness of authorised firms, including minimising the impact of their failure. Aviva Financial Adviser Academy v2016

6 The legislation states that the FCA will have an overarching strategic objective to ensure that the relevant markets function well It will also have three operational objectives: More information on the FCA can be found on their website: In addition to being responsible for the regulation of the UK financial services market, the Government also influences the UK markets through their fiscal and monetary policy. The table below shows examples of how fiscal and monetary policy work: Fiscal Policy Monetary Policy A 100 reduction in tax may be spent on imports and therefore may not benefit the UK economy in full. Government sells gilts to raise money. Bank of England s Monetary Policy Committee (MPC) raises and lowers interest rates as its main tool to influence the economy and meet inflation targets. Aviva Financial Adviser Academy v2016

7 The equivalent 100 spent by the government on domestic products can be more beneficial as they can direct where they spend the money i.e. on UK products and services. Bank of England buys and sells Gilts to influence short term interest rates and the amount of money in the economy. Rising interest rates dampen the economy as they encourage saving and discourage borrowing. Higher taxation slows down the economy as people have less to spend. Lower taxation stimulates the economy as more money is available to spend. Buying Gilts back stimulates the economy as it inputs money into the markets. Selling Gilts dampens the economy as it takes money out of the market. Quantitative easing is where the Bank of England buys back Gilts and corporate debts to increase money available in the markets stimulating the economy. Lowering interest rates stimulates the economy as borrowing becomes cheaper and there is less incentive to save. 1.8 The UK s welfare and benefits system includes the NHS, unemployment and sickness benefits, and state pensions. The Department for Work and Pensions is responsible for the payment of state benefits. The increasing cost of state provision, caused primarily by the ageing population and fewer tax payers, means that benefits are low and at a subsistence level only. This creates a need for professional financial advisers who can help customers prioritise their spending, to ensure that they are taken care of in the event of either death or illness and during their retirement years. Aviva Financial Adviser Academy v2016

8 Financial Services, Regulation & Ethics Learning Outcome 1 (FSRE1) End of Module Test Multiple Choice Questions Question 1 - What is the impact of EU legislation on the UK financial services industry? 2 - Which of the following is NOT one of the key areas covered by the Financial Services Action Plan (FSAP)? Answer A. It influences how the Financial Conduct Authority creates its own policies B. It regulates all changes to the industry C. It controls the policies of the Financial Conduct Authority D. It has no direct impact A. setting of interest rates to meet inflation targets B. a single market for wholesale financial services C. open and secure retail markets D. prudential rules and supervision 3 - Which Government department is responsible for the payment of state benefits? A. The Department for Work and Pensions B. HMRC C. The Bank Of England D. The Department of Social Security 4 - One of the major roles of the Financial Action Task Force (FATF) is to deal with what sort of issues? A. Product charges B. Money Laundering C. Poor investment fund management D. Compliance with FCA rules and regulations 5 - What main tool is used to influence economic activity by the Bank of England? 6 - Quantitative easing can be described as the Bank of England A. Reports from the Committee of European Banking Supervisors B. The level of the UK base interest rate C. Buying and selling Treasury Bills in the market D. Government borrowing levels compared with other EU countries A. buying Gilts and Bonds to increase money supply B. buying Gilts and Bonds to reduce money supply C. selling Gilts and Bonds to increase money supply D. selling Gilts and Bonds to reduce money supply 7 - The primary objective for the Bank of England when setting interest rates is to A. meet inflation targets B. maintain liquidity for the clearing banks C. control the money supply D. increase Gilt prices Aviva Financial Adviser Academy v2016

9 8 - Who is ultimately responsible for control of the Financial Conduct Authority? A. The Chancellor of the Exchequer B. The Governor of the Bank of England C. The Bank of England Monetary Committee D. The Prime Minister 9 - Which of the following is NOT a way of reducing risk? A. Self-insurance B. Collectives C. Derivatives D. Reinsurance - End of Questions - Aviva Financial Adviser Academy v2016

10 Answers Question 1 - What is the impact of EU legislation on the UK financial services industry? 2 - Which of the following is NOT one of the key areas covered by the Financial Services Action Plan (FSAP)? 3 - Which Government department is responsible for the payment of state benefits? 4 - One of the major roles of the Financial Action Task Force (FATF) is to deal with what sort of issues? 5 - What main tool is used to influence economic activity by the Bank of England? 6 - Quantitative easing can be described as the Bank of England 7 - The primary objective for the Bank of England when setting interest rates is to Answer A. It influences how the Financial Conduct Authority creates its own policies A. setting of interest rates to meet inflation targets A. The Department for Work and Pensions B. Money Laundering B. The level of the UK base interest rate A. buying Gilts and Bonds to increase money supply A. meet inflation targets Aviva Financial Adviser Academy v2016

11 8 - Who is ultimately responsible for control of the Financial Conduct Authority? 9 - Which of the following is NOT a way of reducing risk? A. The Chancellor of the Exchequer A. Self-insurance Aviva Financial Adviser Academy v2016

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