FINANCIAL SERVICES ohp's

							FINANCIAL SERVICES

UNIT 14

NO EXAM.

ASSESSMENT IS BY REPORT.

HANDED IN: TO BE ANNOUNCED.

WHAT WILL YOU STUDY?

3 KEY SECTIONS:

1.The Financial Services Providers and how they are
regulated.

2. Financial Services for personal customers.

3. Financial Services for businesses.

WHAT YOU NEED TO DO?

1. Listen.

2. Ask plenty of questions.

3. Carry out a lot of research.
                              1
WHEN SHOULD YOU BEGIN?

        IMMEDIATELY

WHERE CAN YOU GET THE INFORMATION YOU
NEED?

1.THE DAILY MAIL every Wednesday, for the
PERSONAL FINANCE SECTION.

2. THE SUNDAY TIMES, for the PERSONAL
FINANCE SECTION.

3. BANKS, BUILDING SOCIETIES, INSURANCE
COMPANIES, FIRMS OF ACCOUNTANTS, HP
COMPANIES i.e. their leaflets and brochures.

4. THE FINANCIAL SERVICES TEXTBOOK.
DETAILS TO FOLLOW.

5. WHICH INVESTMENT magazine.

6. MONEY MANAGEMENT magazine.

7.The “WEB” sites of the major providers i.e. by
downloading the info you need.


                          2
The HALIFAX: www.halifax.co.uk
EGG: www.egg.com
FIRST-E: www.first-e.com
BARCLAYS: www.barclays.co.uk
NORWICH UNION: www.norwichuniondirect.co.uk
DIRECT LINE: www.directline.com
EAGLE STAR DIRECT: www.eaglestardirect.co.uk
SCOTTISH WIDOWS: www.scottishwidows.co.uk




                      3
SECTION 1: THE FINANCIAL SERVICES
PROVIDERS.

There are many providers.

1. BANKS

There are the traditional Banks e.g. Barclays,
Lloyds/TSB, HSBC, NAT WEST.

There are also the “new Banks” e.g. The Halifax and
Abbey National. They were formally Building
Societies.

All of them are PLC’s.

WHY WOULD YOU CHOOSE A BANK TO
PROVIDE YOU WITH A FIN SERV?

a. Many branches.
b. Wide range of services.
c. Experienced staff.
d. Expert advice.
e. Can offer a “comprehensive package”.

2. BUILDING SOCIETIES

Large organisations providing wide range of services.
                            4
Mainly to personal customers.

Largest one is Nationwide. Most have now de-
mutualised.

Examples of these are The Halifax and Abbey National.

Typical business customer would probably use a Bank
for most of its fin serv needs.

However, Building Societies popular with personal
customers.

WHY?

a. Expanding rapidly.
b. Improved quality.
c. More choice of products.

3. ACCOUNTANCY FIRMS

Typical firm quite small.
Usually providing a local service.
Normally formed as a partnership.

However, some very large national firms offering
nationwide service and wide range of accountancy
services:
                              5
Taxation.
Preparation of final accounts.
Auditing.
Cash-flow forecasting.
Advice.

But small locals have some benefits:

a. Can provide tailor made service.
b. Build up one-to-one relationships with customers.

However, range of services can be limited. So customer
may have to look elsewhere for specialist advice.

4. INSURANCE COMPANIES

Provide wide range of insurance/assurance services.
Usually large firms, but many small locals as well.

Some operate through agencies or brokers.

Agency: An estate agent or accountant recommends
customer to take out policy with specific insurance
company.

Broker: Offers customers insurance through a number
of insurance companies via provision of quotations.
                            6
5. HP/LEASING COMPANIES

Specialist companies that provide finance to acquire
assets via HP or a lease.

HP: Customer buys asset with initial deposit. Pays
balance over 3 years. Final payment gives legal title.

Leasing: Customer rents asset. Never become legal
owner.

6. INVESTMENT COMPANIES

Companies that invest money for customers. They
operate and manage:

Unit Trusts.
Investment Trusts.
Pensions.
Share investments.

Small local firms provide such a service. But they lack
capital. Thus more risk and less security.

Customers more likely to choose large national
provider.

                            7
7. RETAIL COMPANIES

Latest entrants to financial services market e.g.Tesco,
Marks and Spencer, Dixons.

Typical customer is a personal one.

Smaller range of services than Banks.

Normal services: credit cards, personal loans, HP.

Benefits over traditional providers:

a. Large selling networks.
b. Brand loyalty.
c. Ease of contact and marketing.

The above 7 groups are not always independent of one
another. They are often grouped or integrated to offer
as wide a range of services as possible.
Examples: Lloyds = TSB/ Scottish Widows/
Cheltenham and Gloucester.
HSBC = Midland.
Dixons = Freeserve.

Integration can be horizontal or vertical.

Benefits for customers:
                            8
a. Very wide range of services (one stop shop).
b. Economies of scale.
c. Vast resources e.g. for marketing.
d. Expert staff and specialists.
e. Branch networks are large and nationwide.




                           9
REGULATION AND CONTROL OF THESE
PROVIDERS

Wherever a business offers a fin serv there is scope for
dishonesty, fraud and financial loss. Thus a need to
protect the customer.

Reasons for control:

a. Safeguard the customer e.g. against unfair practices.
To ensure the contract is fair and explained properly.

b. Professional integrity e.g. need to ensure that only
competent and professional people are fin serv
providers.

c. Prevention of fraud.

3 key ways of regulating and controlling the fin serv
industry.

1. Government legislation

a. The Financial Services Act 1986

Set up the Securities and Investment Board to control
the industry. In 1997 all of its work taken over by The
Financial Services Authority (FSA).
                            10
b. The Banking Act 1987

Banks had to be authorised to call themselves Banks.
Gave powers to Bank of England to investigate Banks.
Set up a Deposit Protection Scheme. Now called
Investors Compensation Scheme.

First £30,000 of deposit is 100% protected. Next
£20,000 is protected 90%.

c. The Insurance Companies Act 1982

Basically controls the way insurance companies operate
e.g. the way they advertise.

d. The Insurance Brokers (Registration) Act 1977

Created the Insurance Brokers Registration Council
(IBRC), which is a recognised professional body
(RPB).

Any person or business offering an insurance broking
service must first register and enrol with the IBRC.

2. The Office of Fair Trading (OFT)

Key aim of the OFT is to protect the customer.
                          11
Provides much advice on legal matters e.g. via its
website.
It has powers to investigate complaints made by
consumers.
Produces reports on its findings.
Could therefore mean bad publicity for a company
found to be acting unfairly against the consumer.

3. The Financial Services Authority (FSA)

Created in 1997. The main regulatory and supervisory
body in the UK.

It supervises the “front-line regulators”. These are the
bodies that were set up to carry out specific aspects of
the regulatory work.

2 main bodies:

a. The Personal Investment Authority (PIA)

Set up in 1994. A self regulating organisation (SRO)
i.e. it controls itself, but is accountable to the FSA.

Main aim: To authorise and regulate independent
intermediaries (II’s).


                            12
What is an II?

A go-between who links a customer with a provider.
Think of them like a broker.
They offer impartial advice to the customer i.e. they
don’t favour any one particular company.
They will offer advice and provide fin serv’s from a
number of providers.
The PIA ensures that the advice given is impartial and
is only in the best interests of the customer.

b. The Investment Management Regulatory
Organisation (IMRO)

Set up in 1986. Lays down rules that relate to the
investment practices of:

Investment managers
Unit Trusts
Pension Funds

Rules that relate to how they invest your money and
where.

In addition to the above bodies, there are also:



                            13
Trade Associations and Codes of Practice.

TA’s: Voluntary bodies set up by firms in the industry.
They aim to provide a reputable service to customers
e.g. Association of British Insurers (ABI).

C’s of P: Often drawn up by TA’s. They are sets of
rules that members should follow when offering their
services to the customer e.g. the ABI has its own C of
P.

What are the benefits of all of the above laws and
bodies?

a. Minimum standards are laid down that the FSA and
SRO’s enforce. If these were not there the customer
would suffer.

b. Provision of information is required by the
controlling bodies e.g. about the way the providers are
operating.

c. There is much consumer protection e.g. through the
powers of the FSA, via CAT marks (cost, access and
terms).

                END OF SECTION 1

                           14
SECTION 2: FIN SERV’s FOR PERSONAL
CUSTOMERS

4 key parts.

A. THE SOURCES OF FINANCE, SAVINGS AND
INVESTMENT

Personal consumers will have a variety of fin serv
needs e.g. personal loan, mortgage, pension, credit
card.

The key need is for money (finance).

This need for finance can be classified into 3 time
periods:

1. Short-term borrowing

 For periods up to 6 months. To cover the day-to-day
spending needs of the consumer.

It should not be used to buy expensive assets that take
many years to pay off.

The types of borrowing include:


                           15
a. The overdraft

This allows a customer to “go overdrawn” by an agreed
limit set by the Bank e.g. £500. The Bank would now
clear cheques that normally would be “bounced”.

You only pay interest on the amount overdrawn.

It should only be used when really necessary. Should be
seen as a temporary source of credit.

b. Credit cards

There are a vast range of cards available and many
different providers, ranging from Barclays to Tesco.

Customer is given credit limit e.g. £3,000. Monthly
statement sent out.

This gives customer some options:

Pay off whole amount (best option, as no interest is
paid).

Pay off part of the total.



                             16
Pay the minimum e.g. 3% or 5% (the worst option, as
interest is charged on the remaining balance until whole
amount paid off).

c. Store cards

Issued by retail companies e.g. Debenhams, Marks and
Spencer, B and Q, Kwik Fit.

Similar to standard credit cards. However, the rate of
interest can be very high. Therefore a very expensive
form of credit.

People who use them to build up a large balance are
better of getting an overdraft or short-term personal
loan.

2. Medium-term borrowing

For periods from 6 months up to 2-5 years. Includes
personal loans and HP.

Personal loans:

Traditionally you would go to a Bank. However, there
are now many potential lenders e.g. Building Societies,
Retail Stores.

                           17
Could use it for a wide range of assets e.g. new car,
household furniture, and holiday.

Amount can also be wide ranging e.g. £500 or £15,000.

Loan can be secured or unsecured.

Customer pays a fixed amount per month over the
whole period of the loan. In this case the rate of
interest would be fixed.

But some loans have a variable rate of interest. The
rate charged varies according to the Banks base rate.
Thus a customer might begin the loan when interest
rates are low, but later find that rates are rising and
therefore their monthly payments as well.

The monthly payment is a combination of interest and
capital payments.

Interest is charged on the whole amount borrowed as
soon as it is credited to the customers account. So a
customer must be sure how much they really need and
only borrow that amount.

Once the money is borrowed you are “locked-in” for
the whole period.

                            18
The rule:

If possible only borrow when interest rates are low.

HIRE PURCHASE:

Money borrowed to buy an asset from a retailer e.g. a
computer from Dixons.

Monthly payments are made over an agreed period,
usually 2 or 3 years.

No security required from the customer, as the asset
acts as the security.

Rate of interest charged is usually higher than for
personal loans.

Final monthly payment gives customer legal title.

3. Long-term borrowing

For periods in excess of 5 years, although typical
periods are 7-10 years.

The typical long-term loan is the mortgage, which is a
very long-term contract for house purchase.

                            19
The interest rate will usually vary throughout the
period.

The house acts as the security.

Apart from borrowing the other key fin serv need is for
Savings and Investment.

Saving is more concerned with short-term periods.

Investment tends to relate to longer periods and to
larger sums of money.

Why do consumers want to save and invest?

Due to their needs e.g. to provide a regular income, to
provide sufficient money to purchase a new car.

The key need is future financial security e.g. pension,
health and life insurance. Hence the need for sound
financial planning.

What are the ways of saving and investing?

You can either make regular saving contributions or
lump-sum investments.


                           20
Saving £50 a month for 5 years in a Building Society is
regular saving.
Putting £3,000 in a Building Society for 5 years is a
lump-sum investment.

The key concern whether you save or invest is risk and
security.

To minimise risk.

To maximise security.

The problem is that the higher the potential reward
the higher the degree of risk e.g. investing in Internet
shares can give a very high reward, but the risk of
failure is also very high.

For the small saver the safest returns can be gained
from Banks and Building Societies. However, the
returns will be relatively low.

For someone with more money and willing to take more
of a risk, share investments are a possibility. Although
remember that the risks are much greater.

A good way of minimising risk is to make use of
“pooled investments”.

                           21
Here your money is invested with other peoples money
in a variety of different investments e.g. all the money
would not be invested in one share but a wide variety of
shares.

In this way you spread the risks of potential failure.

The key to success is to spread your savings and
investments e.g. put your money in a number of
accounts in a number of Banks and Building Societies.

What types of Savings/Investments are available to
you?

There is a wide range of schemes available

1. Regular Savings schemes

This includes accounts with Banks, Building Societies
and National Savings.

Many of these accounts include “extras” e.g.
chequebooks, cash cards.

The key concern is the rate of interest and the terms
of withdrawal.


                           22
Some schemes will require a fixed period of payments
e.g. 5 years.

Others will be open-ended, where you pay in for as
long as you like.
You need to weigh up all these factors before deciding
which provider to go for and which account to open.

The safest provider is National Savings. This is the
Governments own savings Bank. Operates via the
national network of Post Offices.

To encourage people to save the accounts pay interest
tax-free e.g. National Savings Certificates.

One of the most popular schemes is Individual Savings
Accounts (ISA’s). Began in 1999. Replaced PEPS and
TESSA’s.

Can save up to £7,000 per year.

Can take out a maxi-ISA i.e. whole £7,000 as a mixture
of shares, cash and life assurance.

Or mini-ISA’s e.g. £3,000 in shares, £3,000 in cash and
£1,000 in life assurance.

The key benefit is that the returns are tax-free.
                           23
2. Pensions

Number of different schemes available. It all depends
on how much you can afford to save per month.

This is a long-term fin commitment. Choice of
provider needs careful investigation, as well as the
forecast quoted rates of return.

These forecasts depend on how well the provider
invests your money. Remember, the quoted returns
are not guaranteed.

Also, be aware that the provider will charge a fee or
commission to operate the pension for you.

What types of pension schemes are available?

a. Personal pensions

Mostly run by insurance companies.
You can invest between 17.5% and 40% of your
earnings, depending on your age.
Money will be invested in the Stock Market e.g.
shares.
When you retire you can take a lump sum that is tax-
free.
Major part should be used to buy an annuity.
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Example:

You save £100,000 over 30 years.
You take 20% as a lump sum i.e. £20,000.
The remaining £80,000 is invested in an annuity that
pays you 8% per annum (£6,400) until you die.

b. Occupational pensions

These are the best ones to go for.

Why?

Your employer runs them free of charge.
They also make contributions on your behalf.

Maximum amount you can invest is 15% of your
income per year.

Best schemes are final salary based schemes.

Here your pension is based on your last few years of
employment and the number of years you have worked.

Example:

Teacher on £25,000 per year when she retires. She has
contributed for 30 years.
                            25
She would get 25,000 X 30 = £9,375 per year.
                80
She would also get a lump sum of £28,125.

   25,000 X 30 = £28,125.
      3/80
This type of scheme is unique to the public sector.
They are the best because you are guaranteed a
specific amount.

Most private sector schemes are defined contribution
schemes.

Here your pension depends solely on how well the
money (your contributions and your employers) has
been invested.
There is no guarantee from your employer on how
much you will receive.
A poorly invested fund means a small pension.

When you retire you can take a tax-free lump sum.
Although, you should use most of the money to buy an
annuity.

c. Stakeholder pensions

Set up by Government. Begin in April 2001.
                           26
For people without occupational or personal pensions.

Aim: To provide a low cost and easy way of saving for
a pension.

Can pay in up to £3,600 per year. Money invested in
Stock Market. A fund will then be built up.
On retirement you can take 25% as a tax-free lump
sum.
Remainder is used to buy an annuity. This will provide
the monthly pension.

d. Direct investment in shares

A pension resulting from the direct investment of shares
e.g. in the UK Stock Market.

Key point here is to make sure you invest in a wide
range of shares. This spreads the risks.

3. Investment in “pooled” investments

These offer more protection than direct investment.

Reason?

Your money is “grouped” with other people’s money
and then invested in a wide range of investments.
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Investments such as: Property, UK shares, overseas
shares, Cash, Gov stock.

Who provides “pooled” investments?

There are 3 types: Unit Trusts, Investment Trusts,
Open Ended Investment Companies (OEIC’s).

a. Unit Trusts

Run by Banks and Insurance companies.

You can invest a set sum per month (£50) or a lump
sum (£2,000).

This is divided into “units”. Value of units fixed by
provider e.g. 50p a unit.

So £50 a month means 100 units a month.

Money invested in a wide range of investments.
Aim: To spread the risks.

If invested well, value of units rises. They can then be
sold for a profit.

Fee/commission charged by provider.

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Some providers specialise in certain investment areas
e.g. South East Asia.

Value of units can be checked in FT every day.

b. Investment Trusts

Operate like Unit Trusts i.e. invest in a wide range of
investments.

But you don’t buy units, you buy shares in the
Investment Trust.

If the investments are successful the value of the shares
rises. These can then be sold for a profit.

People tend to be more wary of shares as an investment,
so Unit Trusts are more popular.

c. OEIC’s

These began operating in May 1997.
They are a modern version of a Unit Trust.

The OEIC operates as a company and you buy shares
in it.


                            29
However, there is only one price for the share,
whether you are buying or selling.

4. Life assurance-linked investments

LA= an event that will definitely happen (your death)

Types of life assurance:

a. Term

Your life is covered for a number of years e.g. 15 years.

No payout beyond the term.
Cheapest form of cover.
Size of premiums depends on how much cover you
want. The higher the cover the higher the premiums.

b. Whole life

All of your life is covered. Whenever you die the
payout occurs.

Premiums are higher as there is a definite payout.

c. Endowment (the best type)


                           30
Your life is covered for a specific number of years e.g.
25 years.

Policy can be a straight payout e.g. at the end of 25
years you get £100,000.

Or, a “with profits” policy. Here your premiums are
invested to give a payout in excess of the life
guarantee.

However, profits depend on how successfully the
premiums are invested by the insurance company.

A lot of life assurance is now linked to other types of
investments e.g. mortgages, unit trusts and pensions.




B. FINANCIAL ADVISERS

Your main problem in deciding where to invest is lack
of knowledge and info.

Hence need for specialist advice and help.

They can operate as: sole traders, partnerships or
companies.
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What do they do?

Give advice
Provide info
Assess your current and future financial needs
Draw up your personal budget
Advise and help with your tax position
Act as a personal advisor

There are 2 types

Independent advisors or “tied agents”.

a. Independent

Work only for themselves. Give advice on many
products/services.

Can recommend buying a product/service from many
different providers.

Offer impartial and objective advice.

Many are small firms, often providing a local service.
Some are very large e.g. the AA insurance service.

b. Tied agents
                           32
They work for one particular firm. Only give advice on
that providers products/services.

You need to be aware of whom you are dealing with, as
the tied agents advice will be subjective and biased.

They only want to sell their products/services.

Whomever you buy from, they all have one thing in
common: the need to make a profit.

To achieve this they will make use of market
segmentation.

Customers will be divided into segments or target
markets e.g. students, young newly married couples.

Key seg methods:

Social class
Age, sex
Geographical location
Lifestyle
Income
Size of family

Following sag the provider will use the 5P’s to target
the specific groups effectively.
                           33
Price
Product
Place
Promotion
People

Which groups will be targeted?

Students
Homebuyers aged 20- 35.
Middle-aged people (40’s-50’s)
Retired people

C. ASSESSING THE COST AND YIELD OF FIN
SERVICES PRODUCTS

You must be sure of what you are going to pay (the
cost) and what you will get as a reward (the yield).

Just like buying a car, you need to know the cost and its
performance.

If you don’t know, you may make the wrong decision
about which service to buy e.g. you might buy a
mortgage with too high an interest rate.



                           34
a. The cost

This could be a fee or commission.

Normally cost refers to the cost of borrowing i.e. the
rate of interest.

Interest rates are measured and compared either via a
flat rate or an APR.

Flat rate:

Assume you borrow £10,000 for 3 years @ 10% per
annum. This 10% is the flat rate.
Every year you pay back 10% of £10,000 = £1,000.
APR:

The best way of comparing interest rates.

It’s basically an average rate over the whole course of
the loan.

Assume you borrow £12,000 over 3 years @ 10% per
annum i.e. £1,200 of interest every year.

Yr 1: 10% of £12,000 =£1,200. Plus you pay back 1/3
of the capital = 1/3 of £12,000 = £4,000.

                            35
Yr 2: You now only owe £8,000.

But you still pay £1,200 in interest.

     £1,200 x 100 = 15%.
     £8,000

Yr 3: You now only owe £4,000.

But you still pay £1,200 in interest.

         £1,200 x 100 = 30%.
         £4,000

The APR: 10% + 15% + 30% = 55%/3 =18.33%.
The APR is almost double the flat rate. All lenders by
law must quote the APR.

It’s the only way of comparing the true cost of credit.

b. The return (or yield)

This relates to the performance of your investment i.e.
how much are you going to earn, what will your profit
be?



                            36
Example:

You invest £5,000 for 1 year @ 7% per annum.

Yield would be:    7 x £5,000 = £350.
                  100

Example:

You invest £5,000 for 1 year and get £450 in interest.

Yield would be:    £450 x 100 = 9% per annum.
                  £5,000

Best way of comparing yields is to use interest rates.

Many lenders quote compound rates.
Here interest is added to interest earned in previous
years.

Example:

You invest £100 @ 5% for 3 years.

Yr1: Interest is £5

Yr2: Interest is 5% of £105 = £5.25p

                           37
Yr3: Interest is 5% of £ 110.25p = £5.51p

What is compound yield?

Interest is £5 + £5.25p + £5.51p = £15.76p

CY: 15.76% = 5.25%
      3

What are the other ways of comparing the yield?

1. Movements in the Stock Market

Place where company shares and gov stocks are
bought and sold.

A rise in share prices is good for consumers, as it means
the value of their investments has risen.

2 major measures:

The FTSE 100 and the Ordinary share index.

The FTSE 100:

A measure based on the shares of the top 100
companies.

                           38
Calculated by taking the average daily change in their
share prices.

The Ordinary share index

Based on all the ordinary shares quoted on the Stock
Market. A wider measure as it includes many more
shares.

2. Performance ratios for shares

A variety of ratios are used

a. Dividends per share

Assume company has 100,000 shares and gives out
£10,000 as div’s.

£10,000    = 0.1
100,000

For every share issued the investor has earned 10p.

b. Dividend yield

Assume company has given divi per share of 10p and
market price of share is £2.

                               39
Yield would be 10p x 100 = 5%
               £2

c. Earnings per share

Assume company has profits of £2m and 1m shares.

Eps would be £2m = £2 per share.
             1m

Shows how much each share has earned as a result of
the companies success.

d. Dividend payout

Assume company profits are £2m and £200,000 is
given out as divi’s.

£200,000 x 100 = 10%.
  £2m

Shows how willing directors are to give out profits as
divi’s.

e. Price-earnings ratio

Assume market price of share is £2 and earnings per
share is 50p.
                           40
 £2 = 4
50p

You have to pay £2 to get 50p’s worth of earnings.
Or, each £1 of earnings will cost you £4.

The importance of your tax position

This is of major importance when you invest.

2 types of taxes apply

Income tax and capital gains tax.

a. Income tax

An earnings up to £28,000, the rate is 22%.
Any income above this, 40% applies.

So interest earned by a higher rate taxpayer would be
taxed at a higher rate than a basic ratepayer.

This is why higher ratepayers often invest in National
Savings and ISA’s. Because they are tax free
investments.


                           41
b. Capital gains tax (CGT)

A tax paid when you invest in shares, unit trusts,
company stocks and OEIC’s.

If you make a gain (profit) when you sell or cash in
any of these you may be liable to CGT.

You can make a tax free gain per year of £7,200.

Income tax rates apply to the gains. Although the longer
you have held the investment the less CGT you pay.

D. PERSONAL BUDGET PLANNING

This is essential.

A statement of expected income and expenditure over
a specific period e.g. 1year.

By doing this you will be able to:

Plan your fin future
Work out your fin needs
Organise your savings and investments
Identify when you need a particular fin product/service

It is similar to the cash-flow statement of a business.
                            42
Typical budget is an on-going monthly one.

 INCOME                        EXPENDITURE

Surplus/deficit =

Deficit needs to be quickly rectified.
Surplus can be used for savings/investments.

Use of a spreadsheet is an effective way of preparing
the budget.

Good budgeting means:

Knowing where and how to get the info you need
Knowing how to assess risks and benefits
Knowing how to identify your fin needs
Effective decision-making
Knowing how to plan a course of action over different
time periods


           END OF SECTION 2




                          43
SECTION 3: FIN SERV’s for businesses

4 key parts

A. THE FIN SERV’s NEEDS OF BUSINESSES

Businesses just like consumers have fin needs e.g.
overdrafts, loans, business planning.

Need for fin serv’s is on going. They support/underpin
whole business. Helps it operate more efficiently and
effectively.
They support accounting and admin functions.

6 key groups:

1.Short-term finance for working capital

Money borrowed for up to 6 months or so.

To cover costs of buying new stock, materials. To cover
periods when cash is tight and debtors have not paid
their bills promptly.




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2 methods:

a. The overdraft facility

Already covered in section 2.

b. The factoring service

Used to speed up inward flow of money from debtors.

Factor provides:

An organising service e.g. sends out invoices,
collecting money.

An insurance service i.e. cover against non-payment
by debtor.

A cash-flow service e.g. provides up to 80% of sales
invoice values. Remaining 20% passed on once money
has been collected. This improves cash-flow (liquidity)
position of the business.

Factor charges: Depends on size of business and value
of its turnover.

Organising: 2% or 3% of T.
Insurance: Normal insurance rates.
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Cash flow: 2% or 3% above overdraft rates.

2. Medium and long-term finance

Money to pay for fixed capital assets e.g. equipment
and premises.

a. Business loans

Similar to personal loan (see section 2).

Security will probably be required.

Sole traders may use their personal assets.
Companies may use their fixed assets.

b. Commercial mortgages

Special type of long-term loan e.g. 10 years or more.
Security given is the asset being purchased.

c. Leasing

A rental or hire agreement e.g. computers, company
cars.

Typical contract 2-3 years. Monthly fee paid to lessor.

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Agreement includes:

Servicing
Repair
Training
Help lines

Can be expensive over long-term, compared to buying
the asset.

Lessee never becomes legal owner.

d. Hire Purchase

Already discussed in section 2.

Initial deposit e.g. 10%. Regular monthly payments
made for a specific period e.g. 2 years.

Business becomes legal owner with final payment.

But less service/back-up than with leasing.

3. Insurance

Concerned with risk protection.

Key risks:
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Fire
Theft
Public liability (customers on the premises)
Employers’ liability (employees)
Consequential loss e.g. loss of income after a fire.
Defective products e.g. injury to customers.
Motor/transport
Key staff e.g. owners, directors.

Cover must be adequate e.g. the amount the assets are
insured for.

Asset values and cover must be regularly updated.

Small firms will use a traders combined policy. A
comprehensive policy covering all risks. They will also
make use of brokers.

Large companies may use specialist services of Lloyds
of London e.g. insuring oil tankers or aircraft.

4. Payment (money transmission) services

Businesses will need to make many payments every
day:

Wages to staff
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Debts to suppliers
Refunds to customers
Tax to the gov
Payments abroad
Divi’s to shareholders

Use of cash is inappropriate.

Key ways:

a. Cheques

Convenient. Takes 3 days to clear.

b. Standing orders

Regular fixed payments from Bank account e.g. once a
month.

Debtor has control of the payments. Only they can
change the SO.

c. Direct debits

Business allows creditor to withdraw money from
Bank account at regular intervals. Creditor has control
of the payments.

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d. Bankers draft

Normal cheques can “bounce”.
BD is a special type of cheque guaranteed by Bank.
Creditor is thus ensured that the money will be paid.

e. Credit cards

Dealt with in section 2.

Wisely using them can give 6 weeks of interest free
credit.

But building up an outstanding balance can be
expensive in interest payments.

f. Charge cards

Dealt with in section 2.

No credit allowed on such cards. Must pay off whole
balance every month.

g. Payment cards

Very popular. Basically a replacement for cheques.


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Bank usually provides one card that incorporates
payment and cash dispensing facilities e.g. The
Nationwide Flexaccount card.

Some of these cards will clear the money from the
account quicker than a cheque e.g. The Nationwide
card referred to above is a debit card.

The business needs to be aware of this, as it will effect
their cash-flow position.

Most of these cards also operate overseas, as do
charge and credit cards.

h. Payments abroad

Any business that deals in overseas transactions needs
foreign payment services e.g. an importer of raw
materials or an exporter of electronics products. The
major Banks have their own specialist divisions to
provide a vast range of overseas services

Types of services include:

• Collecting cheques: Bank might collect a cheque for
a UK exporter from the overseas buyers Bank. Would
then process it into the exporters account in the UK.

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• Electronic transfers: Bank will transfer funds via
computer e.g. processing payments-in for UK
exporters.

• Discounting bills of exchange: A b/e is basically
a post-dated cheque. Bank will collect it or discount it
for the exporter.

Buys it from the exporter before maturity at less
than face value.

• Documentary letter of credit: A special type of
  letter issued by an importers Bank.

  It’s a promise by them that a specific sum of money
  will be paid by them to the exporter.

  Gives protection to the exporter, as the Bank are
  promising that payment will definitely be made.

• Export factoring: Same as discussed before.

• Foreign exchange services: Would involve
  conversion service, forward exchange contracts
  and foreign currency accounts.



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5. Accountancy services

The accounting function in a business is of key
importance.

Principal a/c services:
a. Taxation

Ensures that correct amount of tax is paid, while
minimising tax liability.

Income tax
Value added tax
Corporation tax
Customs and excise duties
National insurance

b. Cash-flow control and co-ordination

Making sure sufficient money flows enter the business
in order to pay the necessary bills.

c. Book-keeping

To ensure clear and accurate accounting records are
kept.


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d. Auditing

Making regular checks on the financial operation of the
business e.g. checking the annual accounts.

e. Payroll management

To ensure wages/salaries are paid on time and all
necessary deductions are made e.g. tax, company
pension.

f. Business planning

Planning for the future e.g. issuing shares, borrowing
money, expanding overseas, re-locating, and merging
diversifying.

g. General fin advice

Advice on:
Pensions
Insurance
Tax
Investment
Borrowing
Importing
Exporting

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6. Investment advice

A business will often have surplus funds to invest.

Advice will be needed on:

Where e.g. property, shares.
How much.
For how long.

Business will also need advice if it runs its own
pension scheme e.g. where to invest the contributions.

How can a business choose a provider?

There are many potential providers. Many offer a wide
range of services. Many have specialist divisions e.g.
leasing, HP.

Some of the Banks have subsidiaries called Merchant
Banks.

They will:

Issue shares
Raise money e.g. arrange loans
Handle mergers and take-overs
Advise on overseas operation and diversification.
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The basis for selection:

1. Product range

The wider the range the better.

A business will also be interested in the features and
benefits of the products.

2. Cost to the business

This is a major factor. Costs could be in form of:
Fees
Commission
Interest

3. Size and location

The bigger the provider the more services it can offer.
This might attract large businesses.

Although small businesses often prefer a small local
provider. They want that “personal touch”.

Location less important today due to:

Fax
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Internet
Interactive video
Video telephones
WAP phones etc.

4. Reputation

Take time to build, but can quickly be destroyed.

Hence need for provider to give excellent service and
use marketing to enhance its image e.g. TV and other
forms of advertising, sponsorship.

5. The levels of customer care provided

Relates to the way customers are looked after. Need to
give excellent customer care.

This means new customers are attracted.

Also, more customers are retained. Can then be sold
other services.

Good provider should provide:

Prompt service
Reliable products/services
Effective solutions to any questions
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Effective back up
Willingness to be a good listener
An effective and fair complaints procedure
Every customer with a 5* personal one-to-one service
Value for money
A corporate culture that is centred on the customer

B. THE IMPACT OF BUSINESS SIZE ON FIN
NEEDS

The size of the business will effect the number of fin
serv’s needed and the type.

In general, the smaller the business the fewer serv’s
needed.

Another factor will be the stage the business has
reached in its developmental “life cycle”:

Potential new business e.g. “start-up” finance.

Active new business e.g. overdraft.

Developing business e.g. additional loans.

Mature business e.g. overseas investment.

Types of business format
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1. The sole trader and partnership

Small businesses. Suffer unlimited liability. Find it
difficult to raise “start-up” finance.

Will need:
Advice on and preparation of business plans
Business loans
Overdraft facilities
Accounting advice and support
Insurance
Money transmission and payment services

Both businesses are run by self-employed people in
non-company formats.

Therefore need personal fin servs:

Savings and investment advice e.g. ISA
Personal pension advice e.g. which type to choose.
Taxation advice e.g. their tax liability.
Borrowing advice e.g. implications of giving their
house as security for a loan.

May be able to provide some fin serv’s themselves:

Book-keeping
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Completing their tax return
Processing staff wages
Dealing with VAT.

Certainly cheaper. But lack experience and have little
fin knowledge.

Will therefore go to external providers for most fin
serv’s.

2. The private limited company

Medium sized businesses. Have limited liability. Can
raise far more capital.

Benefits over smaller firms:

Easier to finance growth programmes
Operate on a larger scale
Larger premises
Greater bulk buying
Specialist staff
Wider range of products/services
More technology
Greater customer support
Diversification

But can’t use Stock Market to raise extra capital.
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Fin serv’s needed:

Finance e.g. loans for expansion programmes.
Hire purchase and leasing e.g. company cars.
Additional insurance e.g. new premises.
Factoring e.g. debt collection.
Payroll e.g. processing staff wages.

These companies may provide more fin serv’s for
themselves e.g. accounting, credit control.

As they grow in size they will set up specialist in-
house departments or divisions.

These dept’s will take on even more of the fin serv’s
that were formally externally sourced e.g. auditing,
financial control.

3. The public limited company (PLC)

Large businesses. Shares can be sold to general public.
Can use Stock Market if shares are quoted.

Can raise vast sums of money.

Will have a number of specialist in-house fin serv’s
dept’s e.g. accounting, payroll investment.

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But will still need some externally sourced fin serv’s:

Overseas payments
International Banking
Foreign investment
Share issuing
Pension fund management
Merger/takeover advice

4. The public sector organisation

Large organisations.

Local authorities. Schools, Colleges and Universities.
Hospitals. Prisons. Libraries.

Can be seen as businesses. Now required by gov to
cut costs, manage budgets and increase their income.

Many have adopted a “business culture”.

An example of this is contracting-out.

This is where some fin serv activities are provided
under contract by a private sector business e.g. payroll
provided by a Bank.


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Their fin serv’s needs:

Accounting
Investment and the management of surplus funds
Auditing
Pension management
Factoring
Leasing
Payroll
Money transmission and payments
Raising finance e.g. public sector org’s seeking
partnerships with private sector, to provide their service
more efficiently.




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C. FIN SERV’S, INFORMATION AND
COMMUNICATIONS TECHNOLOGY AND THE
INTERNET

All Fin serv’s industry providers must keep up to date
and respond to rapid pace of change e.g. growth of
Internet use.

If not they will quickly cease to exist!
Change is a fact of org’l life.

Principal types of change:

Natural e.g. the weather.
Economic e.g. interest rate changes.
Demographic e.g. birth rate changes.
Social e.g. growth of home entertainment.
Legal e.g. new laws like the minimum wage.
Environmental e.g. the pressure groups.
Political e.g. gov policy of school Internet use.
Technological e.g. the Internet.

i.e. NEDSLEPT forces of change.

Technology is perhaps the major force.

Technology in the fin serv’s industry:

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Personal computers
Laptop computers
Mobile phones
WAP phones
Videophones and video conferencing
Interactive television
Digital television
The Internet
Home Banking
Automated teller machines (ATM’s)

Technology is now closely linked with info and
communications.

The modern and successful business must be an
effective provider of info and a good communicator.

To whom?     The customer!
Why?         Business success depends on them.

How can it be a good communicator?

Listening carefully
Responding promptly
Being pro-active
Knowing as much about customers as possible
Treating them as individuals
Talking to them in the appropriate way
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Using the appropriate method of communication
Using the appropriate language

What info needs to be provided?

New products/services.
Existing products/services.
The providers’ record of success.
The record of the provider in comparison to its
competitors.
Other products/services the customer has not yet
purchased.
How the provider can satisfy the customers fin serv
needs.
The features and benefits of the providers’
products/services.

The database is crucial in providing this info.

Technology is the key vehicle for communicating or
transferring this info.

Without tech you can’t inform the customer or deliver
the product/service to them.

How can tech be used to profit the provider?
 (and benefit the customer)

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1. Software provision

Some providers are involved in developing new
computer software. This can be profitably sold to their
business customers.

Particularly payroll and accounting packages.

2. Home Banking

Customer operates their Bank account from home via
their computer or TV.

Digital TV will mean more services can be accessed in
this way. TV will also become even more interactive.

3. Telephone Banking

Customer accesses Bank and its services via landline or
mobile. WAP phones will mean more services e.g. use
of the Internet.

4. Automated Banking via ATM’s

Hole in the wall machines. Provide many services.
Services are on-line and real time.


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5. Internet Banking
Rapid growth of Internet in very short time. Now 50m
websites worldwide.

Most fin providers are “webified”.

It offers them major marketing and selling
opportunities.

6. Marketing

Perhaps the key benefit of technology is to improve
marketing:

Makes it quicker
Easier to respond to customer
Know more about the customer
Can be focused on each individual customer

How are providers doing this?

a. Via the Internet: Display and advertise via their
websites. Through e-mail after customer makes
contact.

b. Through interactive advertising: By using digital
TV e.g. going to an advert “site”, accessing video
“brochures”.
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c. Through call centres: Large open-plan telephone
centres. Allows provider to gain and maintain
telephone contact with their customers.

d. By using customer databases: Vital tech tool.
Contains vast amount of customer info. Can build up
profile of every customer. Allows provider to target
each customer as an individual.

7. Efficiency savings

Tech can be used to cut unit costs. Particularly labour
costs.

Tech is so much cheaper in the long run than human
labour e.g. quicker.

Although:

Tech is impersonal
Systems can crash
To use it staff need much training
Some staff are de-skilled




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D. The regulation of fin serv’s providers

Dealt with at end of section 1. Re-read this now.
Remember the need for customer protection against
financial abuse, fraud and mis-selling.

Hence need for FSA, PIA, IMRO etc.




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