LIBF-Unit 4

competition and markets authority

competition and markets authority

The body responsible for strengthening business competition and preventing and reducing anti-competitive activities.

counterparties

People and organisations (eg companies) who lend money to and borrow from financial intermediaries (ie financial institutions such as banks)

divestment

The process of selling off parts of a company to make it smaller, eg the Lloyds sell-off that created new TSB branches.

financial intermediary

A financial institution that facilitates the process of lending and borrowing, by taking deposits from those with a surplus and lending those funds out to those who need to borrow.

financial intermediation

The process of taking in deposits from those with a surplus and lending those funds out to those who need to borrow (see financial intermediary).

financial policy committee

A part of the Bank of England that monitors and responds to risk posed to the entire financial services market. Its focus on the whole market makes it a macro-prudential authority.

friendly society

A mutual organisation that offers its members a wide range of financial products, which can include savings, investments, insurance, pensions and annuities.

hm treasury

Her Majesty's (HM) Treasury, the government department responsible for development and implementation of financial and economic policy.

investment banks

Banks that raise funds on the financial markets, rather than accepting deposits as a retail bank does. They use these funds to provide special services to large corporations and to governments. Also known as wholesale banks.

lloyd's insurance market

An insurance marketplace where members (corporations and individuals) employ underwriters to come together and accept insurance risk, dividing it out between the members.

long-term capital markets

Financial markets where long-term debt (ie bonds) and shares in the bank (equity) are bought and sold. This provides a source of funding for banks.

monetary policy

The manipulation of interest rates to maintain low inflation.

monetary policy committee

The Bank of England committee responsible for keeping inflation under control by the manipulation of interest rates.

oligopoly

A market dominated by a few large firms, eg the financial services sector.

peer-to-peer lenders

Online marketplaces that enable people to lend to and borrow from each other without using a traditional financial institution such as a bank or building society.

retail banks

Banks that deal directly with consumers, eg providing current accounts and mortgages.

retail ring-fencing

Separating the deposit-taking part of a bank or building society from the rest of its business so that, in the event of financial difficulties, the ring- fenced deposits of retail customers cannot be used to pay the debts of the more risky investment section of the bank.

short-term money markets

Financial markets where banks borrow over short periods (ie months, weeks or even days), especially from the interbank market, where banks with short-term surpluses lend to banks with short-term deficits.

bad competition

Where there is a small number of large, powerful providers on the market that only aim to maximise their sales, which may result in mis-selling and a lack of differentiation in products.

barriers to entry

The features of the market that make it difficult for new firms to enter and compete.

barriers to expansion

The features of the market that make it difficult for new firms to grow.

competitive market

A market where there is a large number of sellers and where no one of these is so big that it can dominate the market.

concentration ratio

The percentage of a particular market accounted for by a certain number of firms.

customer inertia

The idea that customers are reluctant to change their financial services provider and therefore tend not to challenge poor service.

effective competition

When the providers on the market compete to provide the best product, rather than taking advantage of lack of customer awareness or poor regulation.

genuine competition

Where there are several providers, who are independent of each other, that design a range of clearly differentiated products for consumers to choose from.

market share

The sales that a company makes as a proportion of the total market for the products and services it provides, or the sales of a specific product as a proportion of the total market for that product.

pressure group

A group who act together to try to bring about change. In the case of financial services, they try to pressure financial services providers into making changes to the way they develop, market and deliver their products.

product complexity

The idea that financial services products can be too complicated for consumers to understand.

transparency

When customers are given full information on the products available, the terms and conditions are clearly explained, and customers understand what they are buying and the financial implications involved.

wasteful competition

Where providers spend huge amounts of money on designing, branding and marketing a product that is only slightly different from those of its competitors.

conduct of business

The way in which a business is run. In financial services, the FCA enforces conduct of business regulations, which include requirements for providers to carry out their operations with integrity, skill and diligence, treat customers fairly and communicate with them clearly.

deleveraging

Reducing the amount of debt in relation to assets. In personal terms, this might mean paying off loans, credit cards, etc

economic sustainability

Ensuring that economic activity is carried out in a way that ensures it can continue in the long term, eg by taking account of the capacity of natural and human resources to sustain it.

environmental sustainability

Reducing the negative impacts of human activity on the environment so that natural resources can be sustained into the future, eg by reducing atmospheric pollution and making more use of renewable resources.

equator principles

A set of ethical benchmarks for banks to follow when taking decisions to finance infrastructure projects, such as dams or pipelines.

ethical lending

Lending money to, for example, companies that invest in green technology, or charging lower insurance premiums to people with more carbon-efficient cars.

financial contagion

A situation in which debt works its way through the global financial system; the problems of one group of institutions spread to other institutions, threatening confidence in and the sustainability of financial systems. See systemic risk.

leverage

The amount of borrowing a company has in relation to its assets.

liquid assets

Cash or assets that can be easily converted into cash without losing any of their value.

liquidation

The process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed.

moral hazard

A situation in which there is lack of incentive to guard against risk because the risk-taker believes that they will be protected from any negative consequences. For example, the banks believing that the government would bail them out if they got into financial difficulty and so they would not have to face the consequences of imprudent actions.

mortgage market review

Reforms made to the mortgage market in April 2014 to ensure it is sustainable and works better for consumers.

perilous debt

A situation in which someone is spending more than half of their monthly income on debt repayments.

provider sustainability

A company with a sustainable business model. For example, a bank that is willing to take less risk even if this means giving up the chance of making additional profits. If providers are run sustainably, they will be less likely to fail and, therefore, less likely to trigger a systemic failure.

prudential regulation

Regulation that is designed to ensure financial services providers do not fail or, if they do, that their failure does not have an impact on the wider financial system. One of the ways that this is done is by requiring providers to hold a certain level of capital and also a certain level of liquid assets, so that they can meet demand from customers seeking to withdraw funds.

speculators

People who buy and sell the shares of many companies in order to make quick profits on the deals.

systemic risk

Risk that affects an entire system. In financial services terms, it is risk that begins with one provider or group of providers and spreads because different parts of the financial system are interconnected.

systemically important financial institutions

The large firms within the financial services sector that would cause serious problems for the whole economy if they were to fail.

broadsheets

Newspapers that provide in-depth coverage, with a serious tone to their articles and editorials, eg The Times and The Guardian.

libor scandal

The discovery that some banks had manipulated the interest rates that they use when they borrow from and lend to each other.

mass media

TV, radio, newspapers, magazines and online content that are made available to a wide audience.

middle-market press

Tabloid-format newspapers such as the Daily Mail and Daily Express that carry stories designed to appeal to a wide audience, usually shorter and less complex than those in the broadsheets but less sensational than those in the 'red-top' tabloids.

objective report

A style of journalism that is free from biases, personal views or anything else that attempts to sway people's thinking in a certain manner. It is purely based on facts.

omission bias

Leaving out facts and opinions that tend to disprove or challenge any claims made.

subjective bias

A report based on personal views and experiences, rather than objective facts.

tabloid press

'Red-top' tabloids, eg The Sun and Daily Mirror, which carry short, often sensationalist, stories with little coverage of financial issues.

think tank

An organisation, usually not operating for a profit, which carries out research into topics of political, economic and social policy.

banking act 2009

This Act provides a set of tools to allow the regulatory authorities to resolve (ie wind up) a bank or building society that is in financial difficulty in an orderly way, and so to reduce the impact of a bank failure on financial stability and bank customers.

consumer protection

Designing products and services with customers' needs in mind, rather than making maximum profits the absolute priority. It also involves ensuring that customers are not sold products that are unsuitable for them, and that they are treated fairly.

financial services
(banking reform) act 2013

Legislation that introduced retail ring-fencing for banks and the cap on payday lenders.

financial services act 2010

Legislation that focuses on the need for banks to have a plan in place to deal with situations where they get into financial difficulty.

financial services
act 2012

The main Act of Parliament governing the regulation of the financial services industry.

FTSE 100

The Financial Times Stock Exchange Index, known as the 'footsie'. It is an index of the share price of the 100 companies with the highest 'market capitalisation' (total value of issued shares) listed on the London Stock Exchange.

general data protection regulation

European Union legislation implemented on 25 May 2018. In the UK, its provisions supersede those of the Data Protection Act 1998.

money laundering

The process of making 'dirty' money (money gained from criminal activities) 'clean' - ie making it look as though it has been acquired legitimately.

mortgage equity withdrawal

Additional borrowing based on the difference between the value of a house and the outstanding mortgage (ie if the house is valued at more than the amount the owner has to repay on the mortgage).

national employment savings trust

A pension scheme run by a public organisation, which aims to ensure that the majority of workers are enrolled in an occupational (workplace) pension.

PESTEL analysis

A tool used to analyse how six key areas (Political, Economic, Social, Technological, Environmental and Legal) in the external environment might affect individual and corporate financial decisions.

profit margin

The amount by which income from sales exceeds costs.

annuity

A product where the customer pays a lump sum (the proceeds of a pension fund on retirement) and, in return, receives an agreed set annual amount for the rest of their life.

catastrophic loss

A loss in excess of unexpected loss, which is unlikely but that could conceivably happen.

catastrophe bonds

Bonds purchased by investors who receive a good rate of interest as long as the catastrophe the bond covers does not happen. If it does occur, then they lose their capital and the insurance company does not have to pay them back what they invested; this helps the insurer to lessen its exposure to the disaster.

cyberterrorism

A situation where terrorists deliberately attack computer networks by uploading viruses that cause links and files to malfunction and data to be deleted.

ethical investment

An investment made in a company that takes into account the wider impact of its activities on society and the environment.

exogenous shocks

A significant event that happens without warning and that has large and lasting effects on political, economic, and social systems, eg the Somerset floods of 2014.

gross interest

Interest paid without tax deducted.

ijara home purchase plan

A form of Islamic home purchase plan. The provider buys the client's selected property. The provider then sells the property to the client for the same price under a promise to purchase agreement, with repayment spread over a term of up to 25 years. The provider is the registered owner of the property during the repayment term. The client occupies the property under a lease during the payment term, paying a monthly amount that combines capital repayment and rent for the lease. The monthly payment is fixed for 12 months at a time and is then reviewed to allow for adjustments to the rental element as appropriate; these adjustments will usually reflect changes in external interest rates.

index-linked

Rising in line with inflation.

islamic home purchase plans

Methods of buying a home that are compliant with Sharia law, which forbids Muslims from paying or receiving interest. There are two main types: Ijara and Murabaha home purchase plans (see separate definitions).

loan to value

The ratio of the size of the loan to the value of the property.

money laundering officer

An employee of a financial provider who must be informed of suspicious activity in the business that might be linked to money laundering or terrorist financing, and if necessary report it.

murabaha home purchase plan

A form of Islamic home purchase plan. The provider buys the property at an agreed price and then sells it immediately to the client at a higher price. The exact price depends on the repayment term, which can be up to 15 years. The higher price charged to the purchaser reflects the profit element for the provider. A first payment, typically of around 20 per cent of the property value, is usually required and the client will then make monthly fixed payments to the provider during the term. As the property has been transferred to the client, the property is registered in their name rather than that of the provider.

negative real interest rate

Where the nominal interest rate is lower than the rate of inflation.

nominal interest rate

The actual rate of interest received by a saver.

public sector

The collective name for organisations that are funded through general taxation, eg schools, healthcare, some welfare services.

pure risk

Where risk can only have a downside, eg loss of or damage to possessions.

real interest rate

The difference between the nominal interest rate received by the saver and the rate of inflation.

real terms

A value adjusted to account for changes in prices, eg real income or real interest rate. For example, although someone may receive a nominal pay increase of 5%, if inflation (ie rise in general prices) is 3% then in real terms the pay increase is approximately 5% - 3% = 2%.

sharia law

Rules that devout Muslims follow, which, in relation to personal finance, prohibit the paying and receiving of interest, which virtually excludes a strict Muslim from doing any borrowing.

speculative risk

Where risk can have either a good or a bad outcome, eg a financial loss or a financial gain.

volatility

Changeability, as when the value of an investment moves up and down significantly in a short period.

advertising standards authority

The UK's independent regulator of advertising across all media.

economic climate

The state of the economy at a given time - in a good economic climate people are more inclined to spend money and invest; in a poor climate they are less likely to do so.

gross domestic product

The total value of goods produced and services provided in a country during one year.

market segments

Groups of customers sharing distinct features in terms of, for example, age, income or lifestyle.

market segmentation

Splitting up the whole market into smaller segments within which customers share particular features, eg income, age, lifestyle.

mass market

A broad consumer group that includes a wide range of customers with different age, gender and income profiles.

brand extension

Where new products launched by a business can benefit from the positive reputation associated with the business's existing brands.

customer retention

Activities undertaken to persuade existing customers to stay with a business.