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CISI Course


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How important is the financial services industry to the UK economy?
Arguably, the most important.
How many adults in 7 are estimated to work in a business connected to financial services?
This sector is a huge contributor in terms of both:
1. export income (expertise paid for by foreign entities)

2. a driver of economic growth

What are the sector's 3 basic functions:
1. Facilitating the chain of investment;

2. Managing risk for a variety of businesses;

3. Payment schemes.

What does facilitating the chain of investment mean?
It means channelling 'spare' money to those who need it, for example to expand a business, and will hopefully provide a profitable return.
Give examples of 'payment schemes'
1. CHAPS transfers
2. Cheques
3. Bills of exchanges (BOEs)
4. Credit and debit cards
5. Direct debits

Exchanges / Markets
- Provide a regulated medium for the buying and selling of financial instruments,

Examples: Foreign Exchange, shares (equities), debt instruments relating to corporate, government and local authorities

How can traditional activities be divided?
Wholesale and Retail
What is 'wholesale'
The provision of services to commercial and institutional customers
What is 'retail'
The provision of services to individuals
Describe the traditional 'retail' or 'high street' banking model.
1. Relied on taking deposits from customers and paying interest (e.g. 5%) then lending customers' money to others and charging a higher rate of interest (e.g. 7%);

2. Difference represented the bank's profit;

3. Provided money clearing services and business advice for fees.

Describe traditional international banking.
- Arranging and facilitating cross-border transactions for goods and services (Foreign exchange and letters of credit)

- Aimed solely at commercial institutions

- Wholesale banking

Describe a building society's function:
- Usually long-term savers providing funds for members to acquire a mortgage

- Retail

Describe the history of building societies:
- Traditionally 'mutual' societies (pool of individuals who collectively owned the society)

- These were unincorporated societies

- During the 1980s many 'de-mutualised' and became corporates

- Became companies owned by shareholders

Describe the functions of investment banking:
1. Wholesale trading facilities

2. Operations concerned major transactions for large investment entities, e.g. pension funds

3. Provide corporate finance services, e.g. underwriting facilities, raising capital and M&As

4. Can provide banking for governments

Describe pensions funds:
1. Traditionally employees and employers would contribute to a fund.

2. Employees would be paid a 'final salary' pension.

3. Most pensions are now, however, taking out individually and are therefore 'retail'

4. Government changes:
Final salary - salary level you retire at

Average salary - average level across employment

Describe the role of fund managers/asset managers/investment managers.
1. Manage funds and charge fees, usually a percentage.

2. Managed funds may be institutional, e.g. pooled investments in a pension scheme, mutual investment fund, unit linked insurance policies.

3. May relate to very wealthy individual private clients.

Wholesale activity

Is the provision of insurance wholesale or retail?
Both wholesale and retail.
Describe indemnity insurance
1. Premiums are paid to the insurer who will pay compensations if a specified event occurs. If the event does not occur, the insurance company keeps the premiums.

2. Retail business arranged through household names, Admiral, Direct Line

3. Wholesale through procuring an underwriting syndicate via Lloyds of London.

Describe endowment or unit-linked insurance (formerly assurance)
A larger premium is paid by the insured but he retains ownership of the funds and can reclaim those funds without the event - death - occurring.
Describe derivative trading:
1. E.g. Options, futures, swaps

2. Largely wholesale

3. Buying a future contract allows a company to fix the price that it is going to pay for something in advance e.g. cocoa beans.

Describe the functions of analysts:
- Analysts analyse the market
- specialise on selling 'analysis' to potential investors
- Global economic trends and the impact on UK sectors/businesses
- Global > UK > Sector> Company

Describe the role of a broker:
1. the middle man
2. puts a buyer in touch with a seller and charges a fee.
3. Brokers may make recommendations based on their analysts' research (full service brokers).
4. Some brokers don't offer advice - known as 'discount' brokers
5. Full service can be wholesale (to fund managers) or retail.
6. Discount broking - usually retail

Describe the functions of a market maker (jobber)
1. Buy and sell securities with their own money
2. Sell long positions at a high price
3. buy short positions at a lower price
4. obliged by stock market rules to provide a buying and selling price

Market making is a wholesale activity

The difference between the market maker's buying price and selling price
This is known as the spread
What does going long mean?
When you own the shares
What does going short mean?
When you agree to sell something that you don't already own hoping the price will come down.
Describe the functions of custodians/safekeeping
1. Look after portfolios of investments for a variety of institutions (wholesale)
2. Collect payments due on bonds and dividends from shares and may be responsible for reinvesting those payments
3. Will charge a fee based on the funds in their custody

Describe what private banking involves:
1. Offering a range of products to wealthy private individuals (therefore retail)

2. Services include, tax efficient savings and investments, trust arrangements, preferential lending

3. Many are beyond UK jurisdiction - Channel Islands, the Caymans for tax purposes

Describe how credit card companies make money:
1. Charge interest on outstanding balances
2. Charge retailers who accept the card a fee
What are the four types of retail financial advisers?
1. tied advisor
2. multi-tied advisor
3. whole of market advisor
4. independent financial advisor

Describe a tied advisor
an advisor working for a bank and offering only that institutions products
Describe a multi-tied advisor
an advisor offering more than one provider's products but are still in formal contractual agreements with those providers
Describe a whole of market advisor
An advisor that advises on all the products in the market and is paid by commission, rates of which will vary.
Describe an independent financial advisor
An advisor that offers whole of market advice but has to offer to be paid by fee as opposed to commission
What are the functions of trade and professional bodies?
To lobby and advise on regulation
Provide examples of trade and professional bodies:
1. International Capital Markets Association (bonds)
2. Futures and options association
3. International Swaps and Derivatives Association
4. Association of British Insurers
5. Association of Private Client Investment Management

What are platforms?
- Online facilities that enable advisers and managers to evaluate existing portfolio assets and compare

- Can be both wholesale and retail

- Earn money either by fee or commission from the product provider

Describe the function of third party administrators
- Some firms employ specialist firms for certain administrative functions such as settling transactions, basic accounting or reconciliation activities (checking agreements).

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