Financial Services, Regulation and Ethics Easily Understood 2016

Copyright Adetomi Omidiora

Money
In older civilisations exchange was by Barter. As transactions became bigger and
complex, it became difficult for trading; hence a need arose for Money, which is a
Common Denominator against which the value of all products could be
measured.

Notes and coins are backed by the Government and Central bank and are
referred to as legal tender.
Money includes cash, current accounts, deposit accounts and other forms of
investment.
The financial services industry oils the wheels using money. They serve as
intermediaries (middlemen) by channeling funds from the surplus sector of
the economy into the deficit sector of the economy, making a profit margin
between the two rates.

Functions of Money
Money is a medium of exchange It must be sufficient in quantity, generally
acceptable to parties in a transaction, divisible into small parts and portable.
Unit of Account Goods and services are valued at a particular price. Money
can also be used as a measure of future payments of debts.
Store of value Money serves as a store of value. For example, 1,000
stored in the house today remains 1,000 next year. The purchasing power
of the money could have decreased because of inflation, but that is another
matter, the money is still 1,000.

The Bank of England (BOE)

The Bank of England is UKs Central Bank owned and backed by the UK
Government, which has the sole authority for issuing money (notes and coins
legal tender) and maintaining the stability of the financial system. The BOE also
oversees the clearing houses and the payment and settlement systems.
Other functions
Banker to the Government (also advises the Government).
Banker to all the banks.
Sets Interest rates monthly, through the MPC.
Lender of last resort (if banks are short of liquid funds).
Manager of UKs official reserves (gold and foreign currencies).
Note The Chancellor of Exchequer has limited statutory powers to issue the
BOE with directions when there is financial stress.

Changes in UK Regulation

Structure and service of regulation delivery has changed.

Financial Services, Regulation and Ethics Easily Understood 2016

Copyright Adetomi Omidiora

In April 2013 there emerged a new Financial Services Act 2012 to strengthen
regulation.

Balance of Payments (BOP)

Record of a Countrys trade with the rest of the world.

The UK calculates the BOP in Sterling.
Credit Money going into the UK
Debit Money going out of the UK
Current Account Records trade in goods and services
Visible Trade Goods; Invisible Trade Services
If Credit > Debit Account is in surplus
If Credit < Debit Account is in deficit

To Correct the Deficit:

Discourage imports, encourage exports (produce more at home)

This can be done through:

Imposing tariffs, imposing exchange controls, increasing interest rates

Encourage overseas investment. If it is too expensive in the UK people go
abroad as the exchange rate is high.
Borrowing foreign currency to balance the books.

Capital Accounts Same as above, but considers inflows and outflows of capital
e.g. grants, investments and borrowing

Exchange Rates

Rate of exchange between a currency and another, which will fluctuate daily.

Value of each countrys currency is closely related to the economic condition

in that country which is determined by DD and SS forces in the FX market.
The exchange rate does not affect the domestic value of money.

A strengthening of a currency against another currency is a rise in that

currencys value therefore it can buy more of the other currency.
A weakening of a currency against another currency is a fall in that currencys
value therefore it can buy less of the other currency.
The equilibrium price that would prevail in the spot market will depend on DD
and SS forces as the currencies float against each other.
This equilibrium price changes constantly as DD and SS of the currency
changes which will in turn affect individuals, businesses and the economy.

Financial Services, Regulation and Ethics Easily Understood 2016

Copyright Adetomi Omidiora

It is possible that the central bank of a particular country can intervene by

buying and selling the currency to manipulate their exchange rates.
Each currency has a spot and forward value against another currency for
example the dollar will have a value against the euro and a separate value
against sterling which will go up and down independently.
The exchange rate can be used to manipulate inflation through imports and
exports. Where the exchange rate is high, imports are purchased cheaper as
the value of sterling is high therefore goods are cheaper. This translates into
low inflation whereas exports become more expensive.

The Consumer Rights Act 2015

Relates to goods and services and explains what to do if things go wrong

with more and simplified rights highlighted.
Covers faulty goods, unfair contract terms, flexibility for the FCA, Trading
standards and other establishments to react to consumer law violation, steps
to take when goods and services are not discharged with reasonable levels
of professional care and ways in which services should be in line with prior
agreements and steps to take where services are not.
Aside from updating existing laws there are new rules explaining what steps
to take if services are not discharged in line with prior agreements or
reasonably well (care and skill). In this instance there is an onus on the
business to put things right or provide the full or partial refund.
The Act aims at reducing business to customer disputes including those that
end up in court as well as reducing associated costs and the speed of
dispute resolution.
To this end, post July 2015, alternative dispute resolution commenced - open
to all businesses who have failed to settle a dispute with a customer directly.
The services of a certified alternative dispute resolution provider (DRP) is
engaged and it must be confirmed whether or not the customer chooses to
come on board.

Alternative dispute resolution can also be done through:

Mediation Both parties facilitate agreement
Adjudication The DRP makes decision based on the information both
parties have given. If there is disagreement, a court appeal can be made.
However decision is binding on consumer and business and can be
enforced.
Arbitration Same details as with adjudication except a court appeal cannot
usually be made except in peculiar circumstances

Unfair Contract Terms

The Unfair Terms in Consumer Contracts Regulation 1999 (The Competition

and Markets Authority - CMA)

Financial Services, Regulation and Ethics Easily Understood 2016

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Covered a contract between a supplier of goods/services and a consumer

including the rights and obligations and what seeks to limit or exclude a firms
liability to the customer.
Ceased to be in the light of the Consumer Rights Act 2015.
Covered Fairness, Transparency and Good faith.
Fairness Consumer must not be at a detriment in terms of the imbalance of
the contracts rights and obligations. Must also be in good faith.
An unfair element in a contact does not make the whole contract is null and
void, the contract can continue with the unfair term not being binding on the
client. Only unfair notices which a customer chooses to be bound by will hold.
Unfair terms include high charges if the customer does not want to continue
with the service that have not been supplied, phrases in the contract that

Risk

It is impossible to eliminate risk as it is inherent in every financial product or

service, however it can be minimized, managed or mitigated.
Probability, chance /gambling and unexpected or variable outcomes all
feature in the definition of risk.
Three aspects to the risk definition include the variability in the predictability of
future events because they are uncertain, expectations of occurrences and
the difference in what happens and what is expected to happen.
Risk management involves identifying, assessing, prioritising and seeking to
control risks through an incorporation of risk issues into the decision making
processes of a business.

Two Categories of Risk

Pure Risk (downside)

Chance that events go smoothly and no loss occurs or events go badly and
there is a loss e.g. a borrower repaying a mortgage loan.
There is no upside to this risk either things go as planned and nothing
happens or things go badly and there is a loss.
The risk could be transferred through an insurance policy, which may be
helpful in mitigating against this risk if the adverse event were to occur.

Speculative Risks (Two Way)

A gain or lose situation, as outcome could be better or worse than expected.

Examples are trading results of a firm, trading results of an individual e.g.
trading in shares.
Involves putting a firm in a position to react to unexpected market or
economic conditions to explore opportunities or minimize loses.
Hedging (a derivative) is used to combat this risk as it is not possible to insure
against them. This simply means to take an opposite position at the time to
eradicate or manage the losses.

Financial Services, Regulation and Ethics Easily Understood 2016

Copyright Adetomi Omidiora

Risk/Uncertainty/Sources of Exposure

Uncertainty results from ignorance and lack of information; it cannot be

measured or managed.
Risk is inherent in the transaction and higher in some than others. It can be
given a probability
It is the job of a financial intermediary to do its best to turn uncertainty of its
clients into risk e.g. investing in shares by an uncertain client can be turned
into risk through the use of technical and fundamental analysis.
Where a person is starting a new business, the firm is able to reduce the risk
by assessing the credit history of the borrower, taking collateral where
appropriate, asking for a guarantor and charging an interest rate that
represents the risk taken.
Historical data can be used to calculate probability of outcomes.

The Corporate Culture

Remember ethical approach must be embedded in a firms corporate

structure. The firm must therefore consider the following factors:
A code of ethics Principles that staff must follow. There must be a mission
(value) statement of the firm which triggers and promotes the ethical stance.
Embedding Ethical Behaviour There must be constant reinforcement of
ethical behaviour directly coming from senior management who will lay out
and demonstrate the established principles for all staff to follow. It is only at
this stage of embedment that a firm is considered as an ethical firm.
Analysis of management information An analysis of management
information to consider how well a firms aims are being met and identifying
possible improvements is of vital importance to the firm e.g. a continuous
analysis of the causes and trends of complaints, and working on them, could
lead to complaint reduction which, may lead to cost savings

Ethics in Practice

The former FSA published a Discussion Paper (18) An ethical framework for
financial services publishes in 2002 that identifies the core values and
principles as determined by the FSA, including a range of questions that may
help firms to identify possible ethical issues while doing their business.

Core values embodied by the FCA are

Openness, honesty, responsiveness and accountability.

Treating colleagues and customers respectfully and fairly.
Acting competently, responsibly and reliably.
Developing vision and values- led approach.

Ethics versus compliance

Compliance with regulations and other legislations is vital in the operation of
financial services operation.

Financial Services, Regulation and Ethics Easily Understood 2016

Copyright Adetomi Omidiora

Ethics starts where regulation ends.

There is a gap between what the regulation states (minimum requirement)
and good client service. A firm should be able to add value to the service
which demonstrates an ethical approach.

Treating Customer Fairly

A firms market share is partly dependent on how clients are treated.
The senior management is responsible for implementing TCF, which must be
supported, promoted and built into operations, objectives and culture.
The basis and outcome of TCF is a more confident and informed client.
Information must be supplied in a way that the client can understand to make
the client responsible for the informed decision taken.
TCF must apply at every stage of the financial products life cycle.
The life cycle begins from the design of the product/service, through to sales,
marketing, selling or advising, down to administration and after-sales care.