DipFS Unit 4 Key Terms

Question	Answer
Advertising Standards Authority (ASA)	The UK’s independent regulator of advertising across all media.
AER	Annual equivalent rate is the interest that will be earned on the money in one year and takes into account how often the provider pays the interest (for example, monthly or annually), the effect of compounding the interest and any fees and charges.
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.
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 a lack of differentiation in products and misselling.
Bank rate	The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products.
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.
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.
Brand awareness	Recognition of a brand’s products and qualities by current and potential customers.
Brand extension	Where new products launched by a business can benefit from the positive reputation associated with the business’s existing brands.
Brand loyalty	Continuing to buy a particular product or buy from a particular business even if new and better products are being introduced by competitors.
Branding	The name, design, logo or symbol that identifies the product of one provider from that of another.
Broadsheets	Newspapers that provides in-depth coverage, with a serious tone to their articles and editorials, eg The Times.
Cashback	A service offered by some retailers when customers pay by card. The retailer gives the customer cash and debits the amount of cash handed over from the customer’s payment card.
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.
Catastrophic loss	A loss in excess of unexpected loss which is unlikely but which could conceivably happen
Challenger banks	Any new bank that challenges the ‘big five’. For example, Virgin Money, Metro Bank, TSB, Williams and Glyn, the Post Office and Tesco Bank.
Closed question	A question format that limits respondents’ answers, for example to ‘yes’ or ‘no’.
Cold calling	Telephone calls that were not requested by the person being called, commonly used for market research and sales.
Competition and Markets Authority	The body responsible for strengthening business competition and preventing and reducing anti-competitive activities.
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.
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.
Consolidation loan	A loan used to pay off a number of different debts, meaning that there is then only one payment to make each month, to the loan company.
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.
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.
Corporate social responsibility (CSR)	Any action or project in which a company goes beyond the interests of its shareholders and senior management in order to benefit other stakeholder groups, normally with either a social or an environmental purpose. Also known as citizenship or sustainable responsible business.
Counterparties	People and organisations (eg companies) who lend money to and borrow from financial intermediaries (ie financial institutions such as banks).
Credit union	A mutual organisation (that is owned by its members) that provides a range of financial products, eg savings accounts and personal loans to members. Members of a credit union must share a common bond, eg all work for the same employer or all work in the same district.
Customer inertia	The idea that customers are reluctant to change their financial services provider and therefore tend not to challenge poor service.
Customer retention	Activities undertaken to persuade existing customers to stay with a business.
Customer-led approach	Where a provider finds out what people need or want and then designs a product to satisfy this need.
Cyberterroism	This is a situation where terrorists deliberately attack computer networks by uploading viruses that cause links and files to malfunction and data to be deleted.
Deleveraging	Reducing the amount of debt in relation to assets. In personal terms, this might mean paying off loans, credit cards, etc.
Digital exclusion	Another aspect of financial exclusion – the inability to take part in the computer-based society
Direct selling	Sales that are arranged directly between the customer and the provider without the intervention of a financial adviser.
Divestment	The process of selling off parts of a company to make it smaller, eg the Lloyds sell-off that created new TSB branches.
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.
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.
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
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 resource
Equator Principles	A set of ethical benchmarks for banks to follow when taking decisions to finance infrastructure projects such as dams or pipelines.
Ethical investment	An investment made in a company that takes into account the wider impact of its activities on society and the environment.
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.
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.
Expected loss	The average amount of loss that someone could expect to face, eg loan defaults.
Expert bias	Using an expert from just one side of a debate, meaning that other perspectives are not put forward.
External secondary data	Data published by organisations such as by commercial research companies (eg Keynote and Mintel), which providers use for their own research.
Financial Conduct Authority (FCA)	The organisation that regulates financial firms providing services to consumers and maintains the integrity of the UK’s financial markets.
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.
Financial exclusion	The inability to get access to even the most basic financial services products and services.
Financial inclusion	The delivery of financial services at affordable cost to all sections of society, including the most disadvantaged.
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.
Financial Ombudsman Service (FOS)	An independent body set up by Parliament that settles customer complaints about providers at no charge to consumers.
Financial Policy Committee (FPC)	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.
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 (Banking Reform) Act 2013	Legislation that introduced retail ring-fencing for banks and the cap on payday lenders.
Financial Services Act 2012	The main Act of Parliament governing the regulation of the financial services industry.
Financial Services Compensation Scheme (FSCS)	A compensation scheme that pays compensation to account holders of up to £85,000 per provider if the provider goes into default (in other words cannot pay account holders the money they have in their accounts).
Focus group	A small group of customers or potential customers brought together by the market research company or by the provider itself to discuss how they feel about a particular product, market or service.
Friendly society	A mutual organisation that offers its members a wide range of financial products, which can include savings, investments, insurance, pensions and annuities.
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.
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.
Good competition	Where there is a good number of providers on the market so that consumers have a variety of firms to choose from.
Gross domestic product	The total value of goods produced and services provided in a country during one year
Gross interest	Interest paid without tax deducted.
Help to buy scheme	Help to Buy is a government-backed initiative set up to help home-hunters purchase a property with as little as a 5% deposit.
HM Treasury	Her Majesty’s (HM) Treasury, the government department responsible for development and implementation of financial and economic policy.
Ijara mortgage	A form of Islamic mortgage. The provider purchases the property, takes the legal title and sells the property to the customer at the purchase price. The customer makes repayments over an agreed number of years and also pays rent to the provider for the use of the property. At the end of the agreed term, the ownership of the property is transferred to the customer.
Independent financial adviser (IFA)	A professional who makes financial recommendations to clients, based on products offered by a wide range of providers.
Index-linked	Rising in line with inflation.
Internal secondary data	Data produced by the provider that was once primary data, eg surveys carried out or financial statements prepared.
Interviews	Two-way process for collecting information from customers, usually face to face or over the telephone.
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
Islamic mortgages	Methods of buying a home that are compliant with Sharia law, which forbids Muslims from making money from money (ie earning interest). There are two main types: Ijara and Murabaha mortgages (see separate definitions).
Leverage	The amount of borrowing a company has in relation to its assets.
Libor scandal	The discovery that some banks had manipulated the interest rates that they use when they borrow from and lend to each other.
Liquid assets	Cash or assets that can easily be 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.
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
Loan forbearance	When a lender does not seek to repossess a property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period.
Loan to value (LTV)	The ratio of the size of the loan to the value of the property.
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.
Loss leader	A product offered by a business at a price that is below what it costs the business to produce it; the aim is to attract customers, who then purchase other products on which the business does earn a profit.
Market research	The action or activity of gathering information about consumers' needs and preferences.
Market segmentation	Splitting up the whole market into smaller segments within which customers share particular features eg income, age, lifestyle.
Market segments	Groups of customers sharing distinct features in terms of, for example, age, income or lifestyle.
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.
Marketing mix	The combination of factors that attracts and retains customers, eg supplying the right product at the right price and promoting it effectively. Sometimes summarised as the 4Ps or 7Ps.
Mass market	A broad consumer group that includes a wide range of customers with different age, gender and income profiles.
Mass media	TV, radio, newspapers, magazines and online content that are made available to a wide audience.
Media bias	Reporting a story from a particular perspective, perhaps to reflect the media outlet’s business priorities, or the views of the individual journalist.
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.
Monetary policy	The manipulation of interest rates to maintain low inflation.
Monetary Policy Committee (MPC)	The Bank of England committee responsible for keeping inflation under control by the manipulation of interest rates.
Money laundering	The process of making ‘dirty’ money (money gained from criminal activities) ‘clean’ – in other words making it look as though it has been acquired legitimately.
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.
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 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).
Mortgage forbearance	When a lender does not seek to repossess a property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period.
Mortgage Market Review (MMR)	Reforms made to the mortgage market in April 2014 to ensure it is sustainable and works better for consumers.
Murabaha mortgage	A form of Islamic mortgage. The bank and customer participate in joint ownership of the property, which is divided into shares. The customer buys these shares over a number of years, gradually increasing their share in the ownership of the property.
Mutual organisation	An organisation owned by its customers, who are also its members, rather than by shareholders
Mystery shopping	Using researchers to pose as customers, either in person or via telephone or electronic media, to check the quality of service that a business provides.
National Employment Savings Trust (NEST)	A pension scheme run by a public organisation, which aims to ensure that the majority of workers are enrolled in an occupational pension.
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
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.
Oligopoly	A market dominated by a few large firms, eg the financial services sector.
Omission bias	Leaving out facts and opinions that tend to disprove or challenge any claims made
Open-ended questions	Questions that cannot be answered with just 'yes' or 'no', designed to get the respondent to open up about their thoughts and feelings.
Packaged account	A current account that offers extra benefits, such as travel insurance, for which the account holder pays a monthly fee.
Pareto principle	States that, in many situations, 80 per cent of the effects arise from 20 per cent of the causes. Also known as the 80:20 rule.
Payday loan companies	Online firms that provide instant, very short-term (ie for a few days or weeks), unsecured cash advances of small amounts to customers who need cash immediately, and who are in employment and have payroll records.
Payment protection insurance (PPI)	An insurance product intended to ensure repayment of loans should a borrower face unexpected events that prevent them from repaying the debt.
Peer-to-peer (P2P) lenders	Online marketplaces that enable people to lend to and borrow from each other without using traditional financial institution such as a bank or building society.
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.
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.
Price sensitivity	The degree to which the price of a product affects a consumer’s decision to buy it.
Primary research	Original research carried out by the provider itself and tailored to its own specifications.
Product complexity	The idea that financial services products can be too complicated for consumers to understand.
Product differentiation	The methods providers use to make one product different from and more attractive than others that perform a similar function.
Profit margin	The amount by which income from sales exceeds costs.
Promotion	Paid-for marketing activities, including advertising. It includes all activities that aim to: communicate with people; inform them of goods and services; and persuade them to buy.
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.
Prudential Regulation Authority (PRA)	One of the two main regulators of financial services in the UK (the other is the Financial Conduct Authority).
Public relations (PR)	A specific aspect of promotion known as ‘below the line’ expenditure. It is advertising that is not paid for directly but which keeps a business’s product in the public eye. It is the part of promotion in which the entire message is implicit.
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, for example, loss or damage to possessions.
Qualitative research	Research based on gathering and analysing people’s feelings and opinions.
Quantitative research	Research based on gathering and analysing statistics.
Real income	The value of people’s income in terms of goods and services ie the purchasing power of the income or what people can buy with the income.
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%.
Relationship marketing	An approach that is centred on building a long-term relationship with customers.
Restricted financial adviser	A professional who can only recommend certain types of product from one or a limited number of providers. They are not allowed to use the word ‘independent’ to describe their advice.
Retail banks	Banks that deal directly with consumers, for example, 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
Sales literature	Information such as brochures and leaflets, created by a provider’s marketing department.
Sampling	Choosing a certain number of people (the sample) to represent the total population. Samples are often carefully selected to make sure the mix of ages, gender, ethnicity, lifestyle, etc, is proportional to the wider customer base.
Secondary research	Research that is based on data that already exists (see external and internal secondary research).
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.
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.
Social inclusion	Ensuring all individuals and groups in society can benefit from certain rights and entitlements, such as employment, adequate housing, health care, education and training.
Social sustainability	Concerned with creating communities that foster well-being, peace, security and justice for the people who live in them.
Speculative risk	Where risk can have either a good or a bad outcome, for example, a financial loss or a financial gain.
Speculators	People who buy and sell the shares of many companies in order to make quick profits on the deals.
Stakeholder groups	The groups of people upon whom financial services providers have an impact – including employees, customers, shareholders, etc.
Subjective bias	A report based on personal views and experiences, rather than objective facts.
Sustainable development	Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainable financial product	A sustainable financial product is one that is designed to meet the long-term requirements of those who buy it.
Sustainable financial system	A system in which financial services are delivered in a way that means they can continue to be delivered and meet the needs of customers over the long term.
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.
Tabloid press	‘Red-top’ tabloids eg The Sun and Daily Mirror that carry short, often sensationalist, stories with little coverage of financial issues.
Teaser rate	A very low starter interest rate that makes initial payments affordable, but which, after a short initial period, increases to a higher rate..
Telematics technology	Technology that allows personalised insurance policies to be created based on when and how you drive. Also known as black box’ insurance
Think tank	An organisation, usually not operating for a profit, that carries out research into topics of political, economic and social policy.
'Too big to fail’	Believing that the consequences of one or more of the big banks failing would be too great for any government to allow it to happen.
Transactional selling	An approach to finding and keeping customers that centres on the product rather than the customer.
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.
Unexpected loss	The amount by which the actual loss might exceed the expected loss.
Unique selling point (USP)	An aspect of a brand that makes it different from and better than the brands of other providers.
Volatility	Changeability, as when the value of an investment moves up and down significantly in a short period.
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.

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