UK Financial Services, regulations and ethics

The aim of this course is to enable you to understand some key UK Financial Services, regulations and ethics subject areas and apply your knowledge.

The learning outcomes are appropriate both for someone wishing to supplement their studies for the CF1 exam.

Course material

The course mat...

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...ter links. To view the sub-topics click on each of the topic names. 

Taking the assessments

After reading each chapter click on the "revision test" image to test your understanding of the chapter. 

Tax Tables

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In this section we briefly discuss the functions of the financial services industry within a modern economy.

The financial services industry performs four main functions in a modern economy:

Provides a channel through which savings are channelled into capital management

Provides a means by which savers’ desire for access to their savings (liquidity) can match the needs of borrowers of long-term funds

Allows people and companies to insure against the risks that they do not wish to take, but that others are prepared to assume in return for payment

Allows investors to diversify risks across a number of different investment products

Short term savings

This is most frequently through accounts available from banks and build...

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...two main types of financial instrument used here are shares and bonds. Shares allow investors to buy ownership of a percentage of the company and benefit from any increase in its value and receive a proportion of the profits through dividends. Bonds allow investors to lend money to companies - subject to set conditions - and receive interest on their loan. Interest rates on bonds are generally higher than those offered by banks and building societies as there is a higher risk of the investment not being repaid. These products can be purchased directly or through collective investment schemes.

In the next section we shall briefly consider some of the key institutions and markets that operate within the industry and the services being provided.

We now consider the main institutions and organisations that operate within the financial services industry and the role they play in the financial markets.

The UK financial services industry is part of a wide systems of organisations and markets including; money markets, capital markets, commodity markets, foreign exchange markets, insurance companies, investment companies, life insurance and pensions companies, reinsurance companies and investment houses.

In this section we will focus on those which connect directly with the general public.

Banks and Building Societies

These institutions’ core activities include provision of deposits, loans, wills and executorship services to retail customers. In addition, they provide payment and money...

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...ation, which has allowed them to offer tax-efficient savings plans, although these are restricted in type and size of investment that can be made into them. The Friendly Societies Act of 1992 allowed them to apply for corporate status which, if granted, enables them to also offer unit trusts, OEICs and ISAs. The products can be distributed by sales staff of the organisation or via independent financial advisers.

Multi distribution organisations

Many organisations have recently recognised the value in having a large loyal customer base (e.g. Tesco and Marks & Spencer) and have started to offer a small range of financial products including life assurance, ISAs and collective investments such as unit trusts and OEICs and in some cases also pensions.

The UK joined the European Economic Community (EEC) on 1 January 1973 which then became known as the European Union (EU).

The benefits of being an EU member included free trade between member states...

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...down, and in May 2022 it was announced that the Financial Services and Markets Bill will revoke the retained EU law on financial services replacing it with an approach designed specifically for the UK.

Moving on to consider the UK, the Chancellor of the Exchequer has direct responsibility for financial services. He introduces legislation to regulate the industry which is implemented by the Treasury.

The Financial Services Authority was established in 1997 and was the single statutory body from  2000, although still under the control of the Chancellor of the Exchequer. The Financial Services and Markets Act (FSMA) 2000 and the Financial Services Act 2012 govern regulation and conduct in financial services today. The Financial Services Act 2010 created a new objective of financial stability which was shared between the FSA, the Treasury and the Bank of England. The Financial Services Act 2012 then radically changed the regulation of the UK financial services industry from April 2013. The current UK regulatory framework consists of:

The Financial Policy Committee (FPC) – a part of the Bank of England which monitors the economy for risks to the country’s financial systems

The Financial Conduct Authority (FCA) – has conduct and market responsibilities and authorises smaller firms (e.g. financial intermediaries and mortgage brokers). Any firm carrying out a regulated activity must be authorised and registered by the FCA

The Prudential Regulation Authority (PRA) – part of the Bank of England which authorises and prudentially regulates (levels of capital, solvency and risk managem...

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... Savings Trust (NEST) - in an attempt to stimulate more people into making other arrangements for their retirement rather than relying solely on the State. At the same time, growing numbers of employers are finding that they can no longer run their final salary pension schemes due to extra costs such as changes in accounting regulations and the removal of dividend credits.

The NHS is also in crisis and the number of State-funded beds available for long-term care is reducing. Although more private facilities are available the costs are high, meaning many more people may have to sell their family homes to meet the costs.

Benefits are essential to prevent poverty which would have far reaching effects on the country and economy. However, benefits are reducing, creating a need for people to make their own provisions. As the population ages and the birth rate declines, there are fewer people paying tax and national insurance to support the increasing demands for benefit payments.

The Government could take a number of further actions to improve the situation including introducing compulsory private medical insurance, providing tax breaks for those making their own provisions for health care and long-term care and further increasing the retirement age for receiving the State pension. These reforms may be expensive to introduce, but evidence suggests that the overall savings would more than cover the initial costs.

In this section we describe what inflation is, some common measures of inflation and its effects.

Introduction

Inflation occurs when prices for goods and services increase. Gradual increases are seen as positive but rapid inflation can have a negative impact on the economy.

Deflation occurs when there is a contraction in economic activity, leading to a decrease in the cost of goods and services. When there is little incentive to buy now as it may be cheaper in the future, there can be significant consequences for the overall economy.

Disinflation occurs when there is a decrease in the rate of inflation. Although prices are sti...

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...ertain investments which are index-linked can provide protection against possible losses. Borrowers can find that the amount of capital outstanding and repayments are eroded by inflation. High inflation can be of benefit to them as it reduces the size and cost of repayments in proportion to their overall income.

Care should also be taken over the impact of inflation on insurance policies. Over time the value of insured benefits could have less real purchasing power if inflation is increasing and policies should be regularly reviewed to ensure they are still providing adequate protection against the financial impacts of death or inability to work.

In this section, we consider some of the ways in which changing interest rates impacts on different financial products.

Fixed interest investments

The products in this category are long term deposit accounts, gilts, certificates of deposit and fixed interest securities, which provide higher rates of interest than variable rate accounts.

This is because there is a difference in the level of short and longer term interest rates.

Short term

Short term rates are closely related to the Bank of England base ...

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...redetermined period of a change in the base rate. This allows the bank to remain competitive and the bank to save on the costs of constantly updating customers with rate changes. As users of these accounts are normally only looking for a short term home for their funds the impact of any changes will have a limited effect.

Long term

When funds are kept in these accounts for longer periods of time, inflation may run at a higher rate than the prevailing variable rates causing erosion in the value of the investment.