Topic 8

• Advice and information on financial services products and services

  • Accurate
  • Up to date
  • Transparent
  • Timely
  • Sufficient but not too complex
• When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions
• The Wealth of Nations was written

  1776
• Rational


  (in classical economic theory) economic agents are able to consider the outcome of their choices and recognise the net benefits of each one
• Rational agents will select the choice which presents the highest benefits
• Consumers act rationally by


  Maximising their utility
• Producers act rationally by


  Selling goods/services in a way that maximises their profits
• Workers act rationally by


  Balancing welfare at work with consideration of both pay and benefits
• Governments act rationally by


  Placing the interests of the people they serve first in order to maximise their welfare
• Groups assumed to act rationally


  • Consumers
  • Producers
  • Workers
  • Governments
• Rationality in classical economic theory is a flawed assumption as people usually don't act rationally
• A firm increases advertising

  Demand curve shifts right
• Demand curve shifting right

  Increases the equilibrium price and quantity
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Many years ago, people were paid in cash and used it to do their shopping and pay their bills. If they had money left over at the end of the week, they stored it under their mattress. Most people could not borrow money and people on low incomes usually went to a moneylender if they could not make ends meet. They did not buy insurance and they did not have much to insure. They could not save for a pension and their children looked after them if they lived into old age
• Nowadays the world is much more complex and life is organised so that most people have to use financial services
• Everyday interactions with financial services

  • Wages and salaries
  • Shopping and bills
  • Buying a home
  • Protecting possessions
  • Planning for retirement
  • Savings
• Advice and information on financial services products and services

  • Accurate
  • Up to date
  • Transparent
  • Timely
  • Sufficient but not too complex
• Factors that influence financial choices

  • The original want or aspiration
  • Feasibility of access to a financial product to fulfil the want or aspiration
  • Information sources
  • Personality
  • Price and product features
  • Reputation of the provider
• Ethics


  The moral principles that govern a person's behaviour or the conducting of an activity
• Ethics are of particular importance in the financial sector because money and finance depend on trust
• Some people expect their provider to balance self-interest with a degree of moral behaviour
• Many financial services providers behaved badly in the years prior to the financial crisis of 2007–08
• Compliance with rules does not necessarily mean that a provider is behaving ethically
• Treating customers fairly (TCF)


  Putting the well-being of customers at the heart of the provider's approach to business
• Treating customers fairly outcomes

  • The fair treatment of customers is central to the corporate culture
  • Products are designed to meet the needs of identified consumer groups and targeted accordingly
  • Consumers are provided with clear information before, during and after sale
  • Advice is suitable and takes account of consumers' circumstances
  • Consumers are provided with products and a service that perform as firms have led them to expect
  • Consumers do not face unreasonable after-sale barriers to change product, switch provider, submit a claim or make a complaint
• Treating customers unfairly


  • Unrealistic claims for the future performance of endowment insurance policies
  • Mis-selling of interest rate swaps to small businesses
  • Mis-selling of payment protection insurance (PPI) policies
  • Unfair charges on unauthorised overdrafts
• Executive pay in large banks has increased out of all proportion to the rate of inflation and to the salary increases paid to bank employees lower down the scale
• Regulators have begun to address the issue of executive remuneration, with the European Union capping bank bonuses at one year's salary, rising to two years' pay if there is explicit approval from shareholders
• The high level of remuneration of top executives has received much adverse comment from the press and from the general public
• People who are unemployed or who saw the real value of their income dwindle during the recession feel resentful when they see a privileged few being rewarded extremely generously, especially when the banks that some of them lead had to be bailed out with taxpayers' money
• Regulators have begun to address this issue and the European Union now caps bank bonuses at one year's salary, rising to two years' pay if there is explicit approval from shareholders
• The UK government was opposed to a cap on bank bonuses, fearing that it would cause senior managers to leave the country and harm the financial sector on which the UK depends
• The UK government's legal challenge against the cap was withdrawn in 2014 as it was 'unlikely to succeed'
• The UK may remove the cap as it has left the European Union
• Ethical response


  For a provider to limit the salaries and bonuses it pays to its top staff, while maintaining a reasonable difference from the pay of people at lower levels in the business in order to motivate and reward top talent
• Banks argue that without large bonuses their executives will leave the City of London for overseas banking centres such as Hong Kong or New York
• Corporate social responsibility (CSR)

  Any action or project in which a company goes beyond the interests of its shareholders and top management in order to benefit other stakeholder groups
• CSR normally has either a social or an environmental purpose and it also goes beyond compliance with laws and regulations