LIBF Unit 4

Variety of institutions

- different sizes
- specific market segments
- eg 'young professionals' who need mortgages and personal loans
- differing legal structures

Interrelation of financial institutions

- smaller institutions use clearing services of a larger one
- All overseen by Bank of England
- Competitions between

Financial intermediation

- take in money to provide services to make a profit
- Provide methods of payments
- Safe storage of money
- Lend money
- Insurance

Banks

- largest are multinational
- Services to personal and business sector
- Proprietary organisations (public companies) owned by shareholders eg government
- Aim for profit
- Also smaller banks just in Uk, not public companies
- Subdivided into retail and investment (wholesale)
- Large banks do both, universal banks
- Now clear divisions between retail and wholesale operations

Retail banks

- provide to individuals and small-medium sized businesses
- Provide money transmission, way to pay and receive money online, debit cards, cheque
- Provide savings and investments
- Provide lending and insurance

Main retail banking firms

- NatWest group
- Lloyds banking group
- Barclays
- HSBC

Natwest group

- formerly RBS
- RBS bought NatWest in 2000
- Owns specialist subsidiaries eg insurance companies
- Gov rescued RBS during financial crisis
- May 2021, gov sold 580 shares to raise £1.1billion
- Reduced ownership of the banks share capital to 54.8%

Lloyds banking group

- 1995, bought TSB and became Lloyds TSB
- 2000, bought Scottish widows (insurance company)
- Gov invested during crisis
- Owned 24.9%
- 2009, split into Lloyds and TSB due to EU court rulings
- May 2017, gov sold all shares

Co-op banking group

- includes Co-op insurance, investments and bank
- Bank owned smile (an internet bank)
- Used to be a member owned mutual bank
- Known for its ethical values and policies
- 2013, had to be rescued by hedge funds, gave £1 billion for 70% ownership
- Since, bank issues new shares to raise money
- Described as a troubled mutual

Virgin bank

- January 2010, bought church house trust (private bank) and became virgin bank Ltd, subsidiary of virgin money
- Bought northern rock (good part)
- Northern rock phased out 2012

Metro bank

- banking license in March 2010
- More than 74 branches

Handelsbanken

- international Swedish bank
- 200 UK branches
- Specialises in long term customer relationships

Retailers banks

- M&S bank, subsidiary of marks and Spencer financial services
- Wholly owned by HSBC
- Tesco bank name of tesco personal finance plc
- Sainsbury bank, owned by sainsburys

Investment banks

- wholesale banks
- Not accept deposits
- Raise funds on markets
- Provide services to large corporations and gov
- Lend large amounts to companies
- Help raise funds by issuing shares
- Advise on mergers and takeovers
- Deal in financial markets to make a profit for themself
- Large uk banks engage both retail and wholesale
- Bank of America Merrill Lynch, Goldman sachs and JP Morgan chase only offer investment banking

Building societies

- smaller
- mutual organisations
- No share capital
- Owned by members
- Not-for-profit, surplus is reinvested
- Nationwide is largest
- Full range of services
- First society in Birmingham in 1775, grew until 1910, 1723 societies
- From 1980s, many became banks, some merged or takeover
- Yorkshire and Chelsea building society merged in 2010
- Number of societies fallen dramatically
- Now only 50 in UK
- Affected by financial crisis as invested in property and exposed to fallen house prices
- Defaults on less creditworthy mortgage business
- Mortgage fraud, brokers overstated value of property it was making loaned on

Insurance companies

- main providers of insurance
- Can be corporates or Muriel's
- Most corporates
- Some (Aviva and AXA) owned by large groups

Lloyds insurance market

- based in London
- Made up of syndicates (groups) of people (members) who employe specialists to accept insurance risk and divide it between them
- Specialists known as underwriters and provide insurance against a range of risks

Credit units

- Co-operatives (mutuals)
- Owned by members
- Part of international movement
- Over 86,000 in 120 countries
- Common bond criteria to be a member, eg live or work in an area
- 2012 laws, can now extend to new groups, eg community groups and businesses
- Over 300 in UK
- Main products are savings and loans
- Share same philosophy, behave ethically, promise responsible lending and affordable borrowing
- Registered under Co-operative and community benefit societies and credit unions act 1965
- Regulated by PRA and FCA
- membership organisation is Association of British credit unions

Friendly societies

- mutual organisations
- Savings, investments, insurance, pensions, annuities
- First formed when people grouped and contributed to a mutual fund
- Name usually includes a place or occupation
- Some have a limited geographical area, others National

Financial advisors

- independent advisers not financial intermediaries
- Help people choose from range of products
- Not connected to a provider and don't advise only one type of product
- Advise on the most suitable product
- Providers employe their own advisers but aren't independent
- Restricted advisers as tied to the range of products offered only by the company

Bank of England

- founded in 1694 and taken over by state in 1946
- Nationalised institution, focus on public benefit
- Core purposes: momentary stability (stable prices) and financial stability (continuance of financial system as a whole)
- was a member of European system of central banks (ESCB) until Brexit
(Not the European Central Bank, which is central bank of eurozone)

Bank of England's functions

• Achieving monetary stability- MPC responsible for stable prices and confidence of currency to achieve economic growth with low inflation, raise and lower interest rates to achieve this
• Achieving financial stability- April 2013, given enhanced regulatory powers, new FPC and PRA
• Acting as a banker to the banks- large banks hold accounts to make everyday payments and receipts, bank lends them money
• Issuing banknotes- only institution in the UK allowed to issue banknotes that are legal tender
• Managing UK's gold and foreign exchange reserves- bank looms after countries reserved used to finance trade

Financial regulators

- bodies that oversee financial system
- ensure sustainability and stability
- lay down rules and supervise them
- require providers to run business prudently and treat customers fairly
- imposes a cost on providers and restrictions
- need to work with regulators to gain freedom and create new profitable product as long as they don't negatively impact
- 3 bodies in the uk: FPC, PRA, FCA
- fully operational April 2013 after financial services act 2012
- operate separately with different objectives but have close links

Financial policy committee (FPC)

- part of Bank of England
- survival and responsibility of financial system
- two main objectives:
• remove or reduce systematic risk to protect and enhance resilience of financial system
• support the economic policy of the goV

Prudential Regulation Authority (PRA)

- part of Bank of England
- regulation and supervision of individual financial services
- banks, building societies, insurers, credit
Unions and major investment firms
- contributes to stability of the system by promoting safety and soundness of firms and people it authorises to operate
- 3 objectives:
• safety and soundness of services by requiring them to behave prudently, to minimise impact if they fail and ensure they continue to provide to customers
• insurance firms: securing an appropriate degree of protection for policyholders
• facilitate effective competition in services

Financial Conduct Authority (FCA)

- separate institution, not part of Bank of England
- ensures financial markets work well so customers get a fail deal
- 3 objectives:
• appropriate degree of protection for consumers
• protect and enhance integrity of financial system
• effective competition in interest of customers
- fights financial crime, detects and prevents money laundering, takes action against firms if use corrupt or unethical methods
- make sure firms protects themself from criminal activities
- grants a license to businesses offering goods on credit or lend money
- can take enforcement action against rogue businesses, and works on irresponsible lending, debt collection practises and debt management

HM treasury

- UK's economics and finance ministry
- responsible for lawmaking and forming the general framework of regulation
- overall responsibility for financial stability
- promotes UK as a world class financial centre
- deals with customer issues
- acts to counter money laundering and terrorist finance

MoneyHelper

- online
- part of money and pensions service
- independent, free, unbiased financial info and education to the public
- enhance financial knowledge and understanding
- help manage their own financial affairs
- offers an online financial health check, Co ordinates debt advice and promotes financial education

Competition and Markets Authority (CMA)

- started in April 2014
- took over after OFT and competition commission disbanded
- taken on dormer responsibilities for promoting competition and making sure markets work well for consumers
- investigates mergers, anti competitive activities and breaches of UK competition laws
- prosecutes businesses that operate cartels
- ensure companies do not operate in a way that makes it difficult for consumers to choose between suppliers

Financial ombudsman service

- settled complaints that customers and financial business are unable to resolve for themselves
- looks into complains on full range of banking products
- independent and impartial arbitrator
- does not act on behalf of either party
- individual circumstances
- decision fair and reasonable
- may be different to what a court would decide when applying legal rules

Financial services compensation scheme

- find that pays to customers if an institution is unable to pay its debts as it has stopped trading or is bankrupt
- protects deposits, insurance policies and investment businesses
- limits to 100% for up to £85000 per person per firm

Trade associations

- UK finance took over from British banker's association (BBA) as leading association for UK banking sector
- 250 banking members
- aims to enhance competitiveness, support customers and facilitate innovation

- building societies association (BSA) is trade association for UK building societies

- association of British insurers (ABI) is trade body for insurance companies
- collective interests of general insurance, investment and long terms savings industry in UK

Temporary public ownership of banks

- during crisis, several banks (including RBS and Lloyds) needed rescuing by gov
- injected funds for a shareholding
- if they failed, system would collapse
- state took ownership
- banks continue to be run by directors
- goV have some input, eg urging banks to loan more to small and medium businesses
- partial nationalisation was meant to be temporary
- UKGI sold significant shareholding of RBS and all of Lloyds

- UK financial investments (UKFI) set up to manage shareholdings
- HM treasury it's only shareholder
- March 2018, functions of UKFI and Shareholder Executive (ShEx) brought together
- formed government company, UK government investments (UKGI)

Run on Northern Bank

- September 2007, failed as not managed finances properly
- unable to raise funds to pay obligations and problems published in media, causing a run on the bank before it fully failed
- gov promised ti guarantee savings and bought the bank
- 'taken into temporary public ownership' and split it into a 'good' and 'bad' bank
- good Bank made of savings accounts and mortgage accounts that were expected to receive payments on
- bad bank made of mortgages where customers had arrears or had defaulted
- by separating, gov hoped that it could save the good bank
- good bank sold to virgin money in 2012 and rebranded
- bad bank repaid £48.2billion bailout loan to gov in 2019

Increased concentration

- banks become larger and fewer
- dominated by a few large firms, oligopoly
- lots of mergers and acquisitions
- to increase market share, eliminate competition and diversify product ranges
- increased more due to financial crisis, weak banks acquired by stronger ones
- building societies also fewer for similar reasons

Competition between banks

- increased concentration means competition in the retail banking market is limited

Divestment

- Lloyds and RBS required by EU to sell some branches and assets
- RBS sold stake in Direct Line insurance group in 2014 and more than 300 branches in 2013

- Lloyds divested from 631 branches under 'project verde'
- Co-op bank tried to buy branches, but deal fell as deficiencies in Co-ops balance sheet
- Lloyds decided to form branches into a new bank under old name of TSB (former trustee savings bank, which merged with Lloyds in 1995)
- TSB floated on stock market in 2014 as a separate company from Lloyds banking group

Ring-fencing retail banking

- under the financial services (banking reform) act 2013
- ring-fence certain retail activities from wholesale (investment)
- a ring-fenced body is one that carries out core activities, which is the accepting of deposits (eg opening of accounts, withdrawal, payment and overdraft)
- goV can add to core activities in the future if it feels necessary
- part that isn't ring-fenced continues as normal
- if insolvency occurs, ring fenced body will still be able to provide its core activities
- depositors money will not be used to pay off banks debt
- however may be higher cost borrowing and more charges as cannot use money made from the wholesale part
- 2016, RBS split retail from wholesale
- HSBC split retail (M&S bank and first direct) from wholesale
- HSBC, Barclays, alloys, Santander all split by January 2019

Financial intermediation

- the bringing together of people who need to save and people who need to borrow
- core work of institutions
- need to classify individuals first into surplus, deficit and balanced sector
- few people are permanently balanced, most people fluctuate regularly between surplus or deficit
- people with surpluses need to find those to lend to with defects and reach an agreement
- hard so process is facilitated by financial intermediaries (institutions) that bring both sectors together
- when bank borrows from the surplus sector to the deficit sector, it acts as a principal that carries out financial intermediation
- banks owe the money they borrow and own the debt that it has lent out
- make a profit between the low interest rate it pays and the high rate it charges but is exposed to risk
- borrow money from surplus sector and lend to deficit sector

Counterparties in financial intermediation

- if use a financial intermediary (lend money to intermediary or borrow from it) knows as end customer or counterparty
- counterparties deposit and borrow money and other services eg insurance
- if bank lends money to a company, the bank and company are the two counterparties
- main categories of financial sector: personal, retail, commercial and corporate, public, financial

Personal sector

- individuals
- save small amounts in different accounts
- invest over long term in pension and insurance to finance retirement
- borrow via mortgage for house purchase
- borrow for general consumption via credit cards, personal loans, hire purchase
- use banks to make and receive payments
- Insure lives and property against general risks

Retail sector

- includes personal sector
- addition of small and medium business
- save and borrow small or medium sized amounts

Commercial and corporate sectors

- largest businesses and companies deposit larger amounts for different time periods
- use fund management services
- use loans to finance working capital, purchase new stocks, equipment, new branches, markets and products
- Insure assets
- use money transmission services eg foreign exchange when import and exporting
- need to borrow large amounts of money and use the services of a number of banks
- helped to access the capital and equity markets

Public sector

- government and other public sector bodies
- receive and pay money via bank accounts
- borrow money from general public and via stock market to finance deficits from spending more than they receive in tax

Financial sector

- financial institutions deal among themselves
- borrow money and lend to eachother in different markets
- to adjust their liquidity and profit positions
- can lend and borrow to adjust their risk profiles according to circumstances
- life insurance companies purchase a wide range of securities
- fund managers make investments on behalf of their customers

Bank's sources of funds- Customer deposits

- amount customers keep in current and savings accounts
- constant movement but steady core of funding
- safer for bank to rely on the source
- lot of competition between banks for customers money in terms of rate of interest paid on savings and additional services offered

Bank's sources of funds- short term money markets

- banks borrow over short periods in the money markets
- months, weeks, days
- borrow from money markets and especially from interbank market
- banks with short term surpluses lend to banks with short term deficits
- eg if bank spent more cash in a trading day than received, it can borrow the difference from the interbank market from a bank that received more cash than it spent

Bank's sources of funds- long term capital markets

- banks raise money for longer periods (years) in the bond market and equity markets
- bonds are long term debt that a bank issues and the people who buy the bonds are lending money to the bank
- equities are shares issues and the shareholders are part owners of the bank

Bank's sources of funds- sale of assets

- occasionally raised money by selling off parts of their business
- especially when they are in trouble

Application of banks funds- lending money

- banks make loans over short, medium and long periods to individuals and businesses
- allows them to finance expensive and cover cash shortages
- mortgage loans, personal loans and overdrafts for individuals
- asset finance and business overdrafts to firms
- banks lend money to eachother in financial markets
- eg bank pay purchase shares in another banking group

Application of banks funds- trading on financial markets

- investment sections of a bank use funds to buy and sell securities in global financial markets
- make gains on price differences
- risky but can be very profitable

Application of banks funds- purchasing physical assets

- invest large amounts in purchase of buildings and computer systems
- allocate money to training programmes and development of new profits and markets

Application of banks funds- paying operational costs

- banks are businesses
- need to cover costs of staff salaries and administration costs

New types of institution- peer to peer (P2P) lenders

- online marketplaces that put borrowers in touch directly with lenders
- bypasses banking system
- legally bindings contrasts and both sides charged by a fee by the firm
- firm says borrowers pay lower rate of interest and savers earn more than with traditional firms
- not protected under FSCS
- but p2p lending regulated by FCA since April 2014
- risk is reduced by strict credit scoring and diversification (money lent by a saver is split up and lent to a number of borrowers)
- eg funding circle which specialises in business loans
- in competition with traditional banks
- aim to provide alternative ways of saving and borrowing
- recently become more well known and were largest form of alternative financier in UK in 2017
- need to persuade savers their money is save and borrowers can access the loans they need

New types of institution- payday loan companies

- online firms
- provide instant ver short term (days/weeks) unsecured cash advances of small amounts
- to customers who need cash immediately, in employment and have payroll records
- FCA introduced cost cap in 2015 but still charge high interest rates
- eg Lending stream, 1,333% APR
- since credit crunch, sector has grown rapidly
- often only source of funding if need to bridge a payment gap
- customers roll loans over when cannot pay on time, debts Mount up to a high multiple of original loan that customer cannot repay
- adversely affects credit score for 6 years, can be difficult to take out a loan or mortgage after
- credit scoring agencies assume only non-creditworthy people who cannot obtain any other loan use them
- high default fees charged when a payment is late could be unlawful under consider law
- charges range between £20-£30 and cumulative effect could be between £240-£360 a year
- criticised for aggressive tactics used to get borrowers to pay back
- FCA reviewed payday loans when it came into power for consumer credit in April 2014
- FCA introduced changed
- fixed default fee cap of £15
- initial cost cap of 0.8% a day
- total cost cap of 100%
- came into force 2nd January 2015

New products

- after financial crisis, banks criticised for creating new products that were not suited to the customers it was sold to
- eg PPI
- also criticised for designing complicated products with lots of terms and conditions that people do not understand
- banks now trying to consolidate existing products, making them simpler and more transparent
- less product innovation
- changed the conditions under which they sell some of their products, especially with loans
- people borrowed too much during crisis and banks had to absorb high levels of bad debt in failing loans
- banks now more risk averse and more careful to who they lend and how much to lend
- if applying for mortgage loan, now provide a big deposit and stringent checks to see if they can afford repayments
- applicants need to show they can afford the loan in addition to essential expenditure by proving their income

New delivery channels

- can access financial products of at local branch of bank or building society by telephone or online
- trend away from branch and towards internet banking
- due to increasing number of access to computers
- people happy to manage existing financial products and purchase new ones online
- trend extended to allow people to access bank accounts via smartphones and tablets by downloading an app
- benefits because you have the ability to:
- pay people and check balance
- change cash machine limit, view PIN and freeze card
- earn rewards on your mobile

Competition

- the number and size of sellers supplying in a particular market
- a competitive market is where there is a large number of sellers where none of them are big enough to dominate the market
- a market where competition is limited has few sellers, some which are so powerful they can inflict prices and quality of products

Balance of power between suppliers and customers

- retail banking sector, customers are individuals or small/medium sized enterprises (SME)
- little power to influence suppliers if they don't like product or price
- can move to different bank, but may not help as interest rates seem to be similar across banks
- to persuade bank to offer better rate, individual depositors need to group together and form a pressure group to be heard
- main commercial banks are very large and has a significant influence on market
- inevitable some complain but have lots that don't complain
- so unlikely to be concerned about complains
- balance of power is in favour of the suppliers rather than the customers

Effective competition

- better for customers
- when banks compete to serve customers well rather than exploiting lack of customer awareness or poor regulation
- banks will act with best motives to provide good products that suit needs at a reasonable price
- offer best deal to attract more customers
- will not aim to attract customers based on their ignorance of better deals or inability to assess if products are unsuitable
- customers able to switch to a competitor if not happy with current provider
- the knowledge of this creates discipline on firms to provide good service as the fear of losing business or new rivals entering allowed them to focus on pleasing existing customers to keep them
- customers need to be informed about different products
- need to be willing and able to switch providers
- not been the case previously in the UK
- measures taken to encourage switching and make it easier

Good competition

- variety of providers
- each firm's products are well designed, respond to needs and are in customers long term interests
- products have a reasonable interest rate and fees are fair, reflects cost to firm of providing product (profit margins not too high)
- does not try sell unsuitable products and no pressure is exerted on the customer to buy
- transparency, given full info on products available, terms and conditions and customer understands what they are buying and the implications
- doesn't try sell products too expensive or unsuitable

Bad competition

- few providers that are large and powerful, only aim to maximise sales
- each supply wide range of products but copy eachother so little product differentiation
- products designed for profit and not needs
- sales staff given targets to achieve so push products onto customers even if cannot afford them
- give customers superficial info about products, exaggerate attractive features in bold headlines, hide disadvantages in small print which people unlikely to read or understand
- same product may be flawed or sold to people where it is unsuitable or too expensive

Example of bad competition- PPI

- product was too expensive or unsuitable and flawed
- eg PPI
- deadline for claims was august 2019
- sold around £50 billion of policies
- billions paid In compensation
- Lloyds paid £17billion compensation costs
- PPI covers loan repayments if unable to meet them due to unemployment or illness
- policies too expensive, sold to people on low incomes who couldn't pay premium
- people believed buying it was an obligation to be approved for the loan
- some could not claim as self employed
- very profitable so most firms participated and promoted policies
- large complains for ombudsman

Wasteful competition

- provider spends too much on designing, branding and marketing products that only differs slightly from competitors
- money better saved to offer power prices
- features may be wasteful is customers don't need them
- basic current accounts free, but enhanced current accounts with extra features cost
- may choose it for value for money but may not need benefits or already have it
- high levels of advertising on tv and radio, on internet, telephone or mail
- customers find it annoying
- money spent on product could be better used elsewhere
- some customers want a normal product, but the volume of the packages available is confusing
- products offered by one company may seem to differ but don't

RBS personal current accounts

Select account
- normal personal current account
- no fee

Reward account
- current account with added rewards
- money back on eligible household bills paid by direct debt, minimum £1250 a month
- account costs £2 a month

Reward silver account
- same rewards as reward account
- with added European travel insurance, phone insurance, fee-free debit card purchases abroad
- costs £10 a month
- only for existing customers

Reward platinum account
- same rewards as reward silver account
- with added worldwide family travel insurance, car breakdown cover
- costs £20 a month
- only for existing customers

Product complexity

- products too complex for ordinary customers
- require knowledge and understanding
- eg personal pension plan is complicated and long term investments are always uncertain and need to be actively managed and make difficult decisions, so high charges when product is sold
- the need to compete creates differentiated products, which become more complex due to special features and conditions
- interest rate for savers very low, so provider may offer higher rate of interest for limited period but may have special terms
- people want simpler products so they do not have to spend time researching
- want transparency of terms and conditions and features and charges
- want it to be how it is portrayed in marketing literature
- hard to make a comparison due to number of features and interest
- need to consider:
- minimum deposit required to earn the rate
- time the interest rate is offered for
- do regular deposits need to be made
- any additional products also provided

Demand side of competition

- retail customers are individuals and small businesses
- rarely act together to let themselves be heard
- however have formed pressure groups
- if customers were informed and finically capable, demand side of market would be more powerful
- can be increased by comparing products and switching providers

Comparing products

- customers need to be able and willing to make comparisons between products
- many customers not financially aware, have difficulty understanding terms and conditions and fees
- should spend time reading product leaflets and browsing Websites to gain required knowledge
- need a clear idea of their own circumstances and what they can afford to allow them to choose suitable products

Switching providers

- customers need to be able and willing to switch without incurring a charge or penalty
- research if I product is better or cheaper
- large degree of inertia, do not make changes readily, people stay with same providers
- younger people increasingly willing so switch after financial crisis
- prompted people to look for best value
- interest rates very low
- most people pay a rate below inflation so savers are not earning enough to compensate them for the increase in prices
- more alert to interest rates and so shop around
- some banks offer bonus interest percentage for a limited introductory period, should switch to another after period is over

Pressure group- save our savers

- Increases power of demand side
- believed savers must be supported and rewarded for saving
- Campaigned against:
- devaluation through inflation
- artificially low interest rates
- unfair legislation and taxation
- exploitative financial practises
- want providers to pay higher interest to savers
- make products more transparent by fully disclosing interest rate and conditions
- all fees charges for managing investments and pensions to be transparent
- no longer an active campaign group, but savers still suffering from low interest rates

Pressure group- financial services consumer panel

- independent statutory body
- represents the interest of customers to aid effective regulation
- supervision of consumer credit sector
- consumers ability to obtain compensation
- the products do what they say on the tin
- price transparency, financial advice, product accessibility
- FCA's ability to deal with the issues preventing effective competition
- effective consumer representation at EU level

- eg research into pension scams
- resulted in feb 2017, strengthening cooling-off periods and restricting elements of marketing of boiler room scams
- wanted a ban on adverts referring to a specific rate of return

Pressure group- centre for social justice

- independent think tank
- seeks to put social justice at the heart of British politics
- Nov 2013, report called 'maxed out: serious personal debt in Britain'
- examined levels of personal debt
- describes high levels of debt as problem debt
- looks at social and medical consequences of problem debt
- calls for an improvement in financial capability, education, better debt advice and improved access to alternative finance (eg via credit unions)

Supply side of competition- degree of concentration

- financial services and personal banking sector very concentrated
- few providers that are very large
- concentration increased since crisis as stronger banks took over weaker ones
- oligopoly, all firms well known and have large market presence
- have good knowledge of eachothers products and prices and know immediately when competitors make changes
- compete less on price and more on product differentiation and heavy marketing
- small difference in interest rates and fees
- differentiate using brand names, special features (making them more complex) and slogans
- promote their own product via tv, radio etc
- informs customers of what is available but doesn't give details
- want to sell its name and image
- hope that when customer buys one product, they will be loyal and buy other products from them
- but competition will increase if customers are willing to switch so concentration will decrease

- more competition in savings and credit card markets
- more contestable, easier for smaller providers to gain business

Concentration ratio

- concentration ratio is the percentage of a particular market accounted for by a certain number of firsts
- eg personal current account market was 85% made of Barclays, HSBC, Lloyds, RBS and Santander
- over 3/4 of accounts were operated by these
- mortgage and personal loan markets also concentrated

Brand names used on current accounts to differentiate them

- RBS select accounts
- Lloyds classic and platinum accounts
- Santander's 123 current accounts (refers to amount of cashback offered)
- nationwide flex account, flex direct and flex plus

Supply side of competition- barriers to entry

- features of the market that make it difficult for new firms to enter and compete
- study by OFT found new entrants face challenges in attracting customers and expanding market share
- main difficulties for personal sector is strong customer loyalty to existing brands, customer preference for banks with extensive networks and a degree of intertidal
- barriers make it hard for new competitors to gain a foothold and deters new firms trying to enter the market
- new firms don't believed they can gain enough customers to cover high start up costs and achieve a successful presence and growth
- financial regulation makes it harder and more expensive for new firms to compete
- if new challenger firms enter the market easier, level of competition would increase

The need to promote more competition

- lack of competition is bad for consumers, hard to switch banks and not much difference between products
- want more competition for more choice, motivates banks to give better services and cheaper products
- needs to be genuine competition, not just different branded versions of same service
- more providers independent of eachother, products useful to customers and can be adapted and priced fairly
- most financial institutions are corporates, owned by shareholders so motivated by profit
- may lead them to take on more risk than is healthy
- new entrance of competitors would put pressure on banks to put customers first and design suitable products at good prices

Methods of increasing competition

- report by independent commission on banking (ICB)
- ways in which to improve competition in financial sector

- encouraging challenger banks and reducing barriers to entry
- consumer choice and current accounts
- regulation

Encouraging challenger banks

- securing emergency of a strong new challenger bank
- small enough to have a strong incentive to compete to grow but also big enough to be seen as a viable alternative to put pressure on providers
- eg virgin money, atom bank, metro bank
- but challenger banks remain small
- eg Lloyds has 1500 branches, metro has 75
- encourage emergency by treating them more leniently on rules of capital and liquidity
- but if too lenient, banks might get into trouble and become insolvent
- encourage challengers to buy the branches and divisions sold by Lloyds and RBS
- virgin money bought good part of northern rock, goV still owns bad part
- goV might prevent large banks growing by putting a cap on their market share, CMA restrict banks merging or taking over others
- European commissions competition department helped enhance competition through policy until Brexit
- encourage entry of foreign banks
- eg spanish bank Santander, took over abbey in 2004 and Bradford & Bingley and Alliance & Leicester in 2008
- Swedish bank Handelsbanken, more than 200 branches in UK in 2022

Reducing barriers to entry for new players

- prudential capital requirements
- a new bank may not raise enough capital and so stops expansion

- access to cash handling facilities
- small bank has a small network so cannot offer customers many locations
- 1/4 of businesses found to choose a bank based on proximity of its bank to their business site

- access to the payments system
- new bank not large enough to be included in payments clearing systems
- so needs to clear it's receipts and payments via a large bank

Current account switch service

- consumers need to identify good products to switch to with minimum cost and trouble
- seen as risky and difficult to switch
- FCA published online article called 'switching an account', helps people understand their rights when switching accounts (current accounts and cash ISAs)

- payments council set up current account switch service in September 2013
- providers of most personal current accounts are participating
- free to consumers
- aims to make switching quick, simple and stress free
- customer can switch on a date that suits them if new bank agrees
- takes 7 days, compared to previous 18-30 days that it used to be
- receipts and payments (eg salaries and direct debits) automatically transferred
- 13 month redirection service, any payments to or requested from old bank are automatically redirected to new bank
- switching process and any problems dealt with by new bank, no need to contact old one
- current account switch guarantee outlines what customer is entitled to if anything goes wrong

FCA role in competition

- main objective to promote effective competition
- believes when competition works well, customers empowered and informer, can take business elsewhere if not happy so firms strive to win custom on service, quality, price and innovation
- protects and promotes competition in general (not protecting specific competitors)
- wants competition to deliver good service (not bothered about individual firms unable to compete and survive)
- agrees barriers to entry should be lowered so new competitors can enter
- introduced a mobilisation phase, allowed competitors to receive authorisation to trade at an earlier stage of its development
- less costly for a new bank if apply for authorisation before paying for developing its infrastructure
- looks into competition issues
- intervene if carries most potential harm to consumers and believes it can help prevent the harm
- eg tackling high degree of market power held by large banks and low rate of account switching

CMA role in competition

- responsible for monitoring and regulating competition in financial services marketplace
- aims to be leading competition and consumer agencies in the world
- main goal to extend competition and protect consumers
- responsible for investigating mergers that can restrict competition
- market studies into entire markets where there are competition and consumer problems
- criminal proceedings against businesses and individuals taking part in cartels or anti competitive behaviour
- enforce consumer protection legislation to protect customers from unfair trading practises
- co-operate with sector regulators and encourage them to use their powers for consumers

Determination of consumer choice

1. Main consideration of type of product, depends on circumstances, eg saving, borrowing, insurance

2. Decide the particular product and the provider

- can consult an independent financial advisor to get expert advice
- bound under professional rules to research products and providers from the whole market and identify which are most suitable
- unlikely to use advisor if looking for simple savings account, but can if pension scheme as more complex with more significant impacts over long time period
- saves customer time and provides professional advice
- but pay fee for the consultation

FCA investigation into price comparison sites

- 40% car insurance and 25% home insurance policies bought online via price comparisons
- 2013, investigation into 14 sites representing 90% of market

- are customers misled, are deals promoted over others
- conflicts of interest (website owned by insurer)
- emphasis on pride rather than service
- cheaper policies but unable to claim
- misled to buying unneeded add-ons
- profit or customers at heart of business
- how do customers browse sites

- found websites did not give customers right amount of info to make informed decisions
- did not reveal conflict of interest
- FCA asked price comparisons websites to address the areas

FCA investigation into cash savings

- see if it was working well for consumers
- 93% of adults have a savings account
- total balances of £354 billion in the easy access accounts the FCA studied
- focused on internet bearing cash savings accounts (easy access, fixed term, cash ISA with no term, fixed cash ISA, notice accounts, children accounts, regular savings accounts)

- found it is not working well for significant amount of consumers
- accounts opened more than 5 years ago pay lower interest than newer accounts
- provides not making savers aware of other accounts paying more interest
- customers put off switching as feel it's a hassle and will not gain much in interest rates
- large providers advantages over small when attracting savers despite lower interest rates

Financial education

- FCA underlined importance of capability
- consumers should take responsibility for decisions under the heading 'principles of good regulation'
- goV raised levels of financial capability by including money management and financial education in citizenship curriculum for school year starting 2014
- aim to prepare pupils to take place in society as responsible citizens and have skills and knowledge to manage their money and make good financial decisions
- 2019 research by LIBF found 64% of students 15-18 years had access to financial education
- only 4% taught it as a separate subject

Sustainability

- Brundtland commission of United Nations in 1987
- meets needs of present without compromising needs of future generations

World summit outcome, 3 pillars:

- 2005, United Nations general assembly
- world summit
- promotes integration of three components of development, economic, social and environmental as interdependent and mutually reinforcing pillars

Environmental sustainability

- reducing negative human impact on ecosystems
- good environmental management eg pollution, waster management and land use
- good demand management, managing human consumption of resources
- involves limiting consumption and and increasing renewable resources
- links to economic sustainability
- eg food sustainable if well managed, can limit effects of consumption on environment by buying locally produced food, reduced food miles
- financial providers should invest in
environmentally friendly companies and by going paperless

Economic sustainability

- reducing the undesirable consequences of economic activity
- production uses earths resources
- societies need to maintain production and consumption on a sustainable scale
- don't always aim to achieve maximum growth
- govs need to regular markers to take env and social effects of demand and supply
- impose green taxes on businesses to limit energy consumption
- financial services, people on low incomes borrow when they can't afford on things they don't need
- banks should lend more responsibly and base lending decisions on affordability

Social sustainability

- creating communities for well-being, peace, security and justice
- when demand increases for scarce resources, good management needed to keep peace
- make education available, reduce gap between rich and poor
- creation of fairer societies to thrive in long term
- firms can use CSR for community projects or fair trade practices

Financial services system

- system that emerges when individual financial institutions come together in markets and create networks between themselves
- survival, stability and sustainability of the networks

Wall Street crash 1929 and Great Depression

- people bought stocks and shares in large quantities
- caused share prices to suddenly rise, known as a bubble, was unsustainable
- when it burst, prices fell and businesses and individuals became bankrupt
- Great Depression followed due to large unemployment and social distress

Financial crisis 2008

- unsustainable levels of debt
- US Lehman Brothers failed, owned money to other businesses so they failed when couldn't recover funds
- other banks nearly collapsed but rescued by gov injecting funds
- banks too big to fail

Effects of a bank failing

- no longer provide products and services to customers
- would trigger other banks to fail
- customers of failed bank hit immediately
- cannot make or receive payments, cannot buy things
- couldn't use debit cards as no confidence the bank could honour the payment
- businesses cannot pay salaries and raw goods
- goV couldn't receive taxes revenue so cannot make payments to hospitals etc
- borrowers, uncertainty and anxiety about who will take over bank and what new conditions loan will be on
- lack of confidence, savers wouldn't lend to them, fewer lending to businesses (credit crunch)
- fall in consumption lead to a recession, which reduces demand more as people do not have jobs or money to spend
- goV gets less as less working, spending and firms making less profit
- govs paying more in benefits so public sector in deficit
- need to borrow money from global market and cut public spending

Systematic risk

- risk affecting stability of financial system as a whole
- eg failure of one bank results in a chain reaction that risks the whole system
- highest risk when providers large, as each provider holds large portion of the system
- known as systematically important financial institutions and failure would cause splash in financial pool
- highest risk when large providers work closely with eachother
- highly interconnected and dependent
- lend and borrow to eachother and part of same payment systems
- markers and complex on a global scale
- transactions electronic so take seconds
- applies nationally and internationally due to global markets
- systematic risk on banking affects entire financial system
- problem of one group infect the network and spread to another, known as financial contagion
- eg European debt defaults during financial crisis
- close interdependence is a weakness
- system based on confidence, so if that isn't there will fail
- realistic chance of financial systems failing and so is not sustainable

In 2020, financial sector contributed...

- £164.8 billion to UK economy
- 8.6% of total economic output

In 2021:
- 1.1 million jobs in financial sector in UK
- 3.3% of all jobs
- taxes raised £28.8 billion
- 4.1% of all taxes collected that year

Gov action

- need to stop contagion of banks
- HM treasury, Bank of England, FSA persuaded people via media Northern Rock was safe and only in trouble due to a run on the bank
- not entirely true but run did make it worse
- issued a guarantee that goV would reimburse any depositor who lost money in northern rock
- thought a guarantee would be too expensive and other banks would demand the same
- 2008, goV forced to take over Northern Rock entirely when RBS and Lloyds looked likely to go into failure
- goV spend £94billion
- £26 bil northern rock, £33b RBS
- injected cash for huge shareholding
- 'nationalisation' or 'taken into temporary public ownership'
- gov intends to sell back shares
- eg northern rock sold to virgin money jan 2012
- sold off all shares of Lloyds, still holds lots of RBS
- US goV didn't save Lehman brothers and went bankrupt sep 2008, biggest bankruptcy in US corporate history

'Too big to fail'

- goV rescue of 2008 prevented systematic failure
- need to prevent failure as size and interconnectedness makes it really important
- but argued saving a bank passes debts to state and transfers problem to taxpayer
- bank keeps its profits in the good times but expects to be rescued in bad times
- too much burden, too big to save
- large bank knows it will get help, may not follow prudential management, risk known as moral hazard
- should face consequences of bad management
- if In trouble, should be allowed to fail but steps taken to minimise impact on economy