This document covers the whole LIBF (DipFS) Unit 4: Sustainability of the Financial Services System text book. All information is condensed and has been produced by a A* student.
1.1.1 - The variety of institutions
- The Uk financial system consists of various types of institution of different sizes
- Each provides a particular range of products to fulfil the needs of customers belonging to specific market segments
- An example of market segmentation might be ‘young professionals’ who may share a demand for mortgages and personal
loans
- The financial system in the UK is very complex and brings together a large number of individual institutions of various kinds,
sizes and legal structures
- Banks = PLC, building societies = mutual institutions
- Each institution sells its own mix of financial products is targeted towards a single market segment
1.1.2 - Banks
- Banking business can be subdivided into retail business and investment business
- Today large banks carry out both types of business and are known as ‘universal’ banks
- The UK introduced legislation under which retail banking were ring-fenced
1.1.2.1 - Retail Banks
- Provide services to individuals and to small and medium-sized businesses that can be grouped under the following
headings:
➔ Money transmission = they provide methods by which people can pay and receive money electronically
➔ Savings and Investment = they provide a range of ways in which people can save their money safely and receive a
rate of interest
➔ Lending = they make various types of loan to allow people to fund the purchase of assets
➔ Insurance = they sell policies that allow people to transfer their risks
- The main retail banking firms are the NatWest Group, the Lloyds Banking Group, Barclays, HSBC
1.1.2.2 - Investment Banks
- Investment banks are also known as ‘wholesale’ banks, they do not accept deposits, they raise funds on the financial
markets
- They:
➔ Lend large amounts of money to companies
➔ Help them to raise funds from investors by issuing share and bonds on the markets
➔ Advise companies on mergers and takeovers
➔ Deal in the financial markets on their own account to make profits for themselves
1.1.3 - Building Societies
- Are mutual organisations which means they do not have to share capital.
- Owned by their members
- They are non-profit organisations and any surplus earned is retained within the business for the benefit of the members
- Nationwide is the largest building society in the UK
- They were affected by the 2007-08 financial crash as they made losses because of their investment in property and
subsequent exposure to falling property prices
1.1.4 - Insurers
- The providers of insurance can be subdivided into two main categories, individual insurance companies and the Lloyds
specialist insurance market
1.1.4.1 - Insurance companies
- They are the main providers of insurance to individuals and companies.
- They may be either corporates or mutuals
- These companies provide insurance against the financial consequences of a wide range of risks, so that customers can
protect against loss or damage to their house
, 1.1.4.2 - The Lloyds insurance market
- Based in the City of London and is made up of syndicates of people known as ‘members'
- They employ specialist known as ‘underwriters’ to accept insurance risk and divide it out between them
- These underwriters provide insurance against a range of risks and also life insurance
1.1.5 - Credit unions
- They are co-operatives, owned and controlled by their members
- To be a member of a credit union, a person must meet the ‘common bond’ criteria that it has laid down
- Legislative changes in the UK in 2012 mean that credit unions can extend their services to new groups
- The main products offered are savings accounts and loans, a small number of them current accounts, mortgages, cash ISAs
- UK credit unions are registered under the Co-operative and Community benefit Societies and Credit unions Act 1965
- Regulated by the PRA and FCA
1.1.6 - Friendly societies
- Mutual organisations that offer their members a wide range of financial products, which can include savings, investments,
insurance, pensions and annuities.
- First formed when people began to group together to contribute to a mutual fund and to receive benefits in times of need.
- Many friendly societies in the UK, some of which serve a limited geographical area, but some have grown into national
organisations
1.1.7 - Pension funds
- Specialises in investing peoples pension contributions which will give these people an income when they retire
- Use long-term savings of millions of people to invest in a wide range of assets: they deal in financial markets to make the
best return and to build up a fund which will pay people their pensions when they retire
1.1.8 - Financial advisers
- Provide personal finance service by helping people to choose from among the wide range of products on offer in the market
- Not connected to any financial provider and don't advise on one singular product
1.1.9 - The Bank of England
- UKs central bank
- As a nationalised institution, its focus is on the public benefit and not on making a profit
- Its two core purposes are achieving monetary stability and financial stability
- The bank has a range of important functions:
➔ Achieving monetary stability
➔ Achieving financial stability
➔ Acting as banker to the banks
➔ Issuing UK banknotes
➔ Managing the UKs gold and foreign exchange reserves
1.1.10 - The Financial regulators
- The financial regulators are the bodies that oversee the financial system with the aim of ensuring its stability and
sustainability
- Lay down rules that banks and other financial services providers must follow
- The rules require providers to run their businesses prudently and to treat their customers fairly
- Complying with regulations imposes a cost on providers and its places restrictions on the ways in which they can carry out
their business
1.1.10.1 - The Financial Policy Committee (FPC)
- Is responsible for the survival and stability of the financial system
- Identifies, monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the
resilience of the UK financial system
1.1.10.2 - The prudential Regulation Authority (PRA)
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