CFMB_AT_v4 - Certificate IV in Finance and Mortgage Broking PDF

Industry Knowledge Topic 1-1: The industry and economy Document classification: Confidential © 2023 Kaplan Education Pty Ltd. All Rights Reserved. The copyright of this material is owned by Kaplan Education Pty Limited and any reproduction, copying or other unauthorised use of this material without the written consent of Kaplan Education Pty Limited is strictly prohibited. While all care is taken to ensure the material presented is accurate and up to date, it should not be relied upon when providing advice or constructing financial plans. External websites Kaplan’s subject notes contain links to the websites of other organisations. Kaplan does not necessarily endorse or support the views, opinions, standards or information contained within these linked websites. Kaplan does not accept any responsibility or liability for any loss, damage, cost or expense you might incur as a result of the use of, or reliance upon, the materials that appear at any linked site. 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Document classification: Confidential Topic 1-1: The industry and economy Certificate IV in Finance and Mortgage Broking Contents 1-1 Overview........................................................................................................ 1-1.4 Topic learning outcomes.........................................................................................1-1.4 Part 1: History and development of FSI............................................................ 1-1.5 1 The Australian financial system............................................................ 1-1.5 1.1 The primary functions of a financial system.............................................. 1-1.5 2 History of FSI in Australia..................................................................... 1-1.6 2.1 1960–1970s................................................................................................ 1-1.6 2.2 1970–1980s................................................................................................ 1-1.6 2.3 1990s.......................................................................................................... 1-1.6 2.4 The Wallis Report....................................................................................... 1-1.6 2.5 Present day................................................................................................. 1-1.7 2.6 Financial System Inquiry............................................................................ 1-1.7 3 The Australian lending industry........................................................... 1-1.9 3.1 Credit.......................................................................................................... 1-1.9 3.2 Lending....................................................................................................... 1-1.9 3.3 The lending market in Australia................................................................. 1-1.9 Part 2: Who are the stakeholders in the FSI?.................................................. 1-1.11 4 Financial services providers............................................................... 1-1.11 4.1 Types of financial service providers......................................................... 1-1.11 4.2 Banks........................................................................................................ 1-1.12 4.3 Non-bank financial institutions................................................................ 1-1.14 5 Service users..................................................................................... 1-1.16 5.1 Consumers and customers....................................................................... 1-1.16 5.2 Business.................................................................................................... 1-1.16 5.3 Government............................................................................................. 1-1.16 5.4 Not-for-profit organisations..................................................................... 1-1.17 Document classification: Confidential © Kaplan Education Pty Ltd 1-1.1 Certificate IV in Finance and Mortgage Broking 6 Regulators......................................................................................... 1-1.18 7 Advisers............................................................................................ 1-1.19 7.1 Financial planners and advisers............................................................... 1-1.19 7.2 Mortgage brokers..................................................................................... 1-1.19 7.3 Stockbrokers............................................................................................. 1-1.20 7.4 Accountants............................................................................................. 1-1.20 Part 3: Which services does the FSI provide?................................................. 1-1.21 8 The primary functions of a financial system........................................ 1-1.21 9 Types of financial services.................................................................. 1-1.21 9.1 Transaction (spending)............................................................................. 1-1.21 9.2 Borrowing (credit).................................................................................... 1-1.22 9.3 Insurance.................................................................................................. 1-1.23 9.4 Saving....................................................................................................... 1-1.26 9.5 Investment............................................................................................... 1-1.27 Part 4: What is the environment the FSI exists in?......................................... 1-1.29 10 Political............................................................................................. 1-1.29 10.1 Legislation................................................................................................ 1-1.29 10.2 The Australian Government Treasury...................................................... 1-1.29 10.3 Government inquiries and commissions.................................................. 1-1.30 11 Media................................................................................................ 1-1.30 11.1 Social media............................................................................................. 1-1.31 12 Environment...................................................................................... 1-1.31 12.1 Environmental degradation..................................................................... 1-1.31 12.2 Impacts of the FSI on environment.......................................................... 1-1.32 12.3 What can be done?.................................................................................. 1-1.32 13 Economic........................................................................................... 1-1.33 13.1 GFC 2007/08............................................................................................. 1-1.33 13.2 Australia and the GFC............................................................................... 1-1.34 Part 5: Global economy................................................................................. 1-1.36 14 Top-down analysis............................................................................. 1-1.36 14.1 Globalisation and deregulation................................................................ 1-1.37 1-1.2 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Part 6: Australia’s economy........................................................................... 1-1.38 15 The RBA............................................................................................ 1-1.38 16 The domestic economy...................................................................... 1-1.39 16.1 Economic growth and GDP...................................................................... 1-1.39 16.2 The balance of payments......................................................................... 1-1.40 1-1 16.3 Exchange rates and the Australian dollar................................................ 1-1.41 16.4 Monetary and fiscal policy....................................................................... 1-1.42 16.5 Economic indicators................................................................................. 1-1.45 16.6 Consumer Price Index.............................................................................. 1-1.46 Part 7: The business cycle.............................................................................. 1-1.49 17 The four phases of the business cycle................................................. 1-1.49 18 Characteristics of the business cycle phases....................................... 1-1.51 19 The duration of the business cycle..................................................... 1-1.51 Part 8: Sustainability in the FSI...................................................................... 1-1.52 20 Triple bottom line.............................................................................. 1-1.52 20.1 TBL sustainability framework................................................................... 1-1.53 References.................................................................................................... 1-1.55 Suggested answers........................................................................................... 1.57 Document classification: Confidential © Kaplan Education Pty Ltd 1-1.3 Certificate IV in Finance and Mortgage Broking Overview As a professional in the financial services industry (FSI), brokers need to have sound general knowledge of the industry in which you operate and specific knowledge of issues related to mortgage broking. As the finance industry in Australia is highly regulated and breaches of legislation can result in severe penalties, knowledge of and compliance with the various applicable laws, regulations and codes of conduct are essential. Topic learning outcomes On completing this topic, students should be able to: describe the history and stakeholders of the FSI explain the role of a mortgage broker within the wider context of the FSI describe the phases, characteristics and duration of the business cycle apply principles of sustainability to their work practices. 1-1.4 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Part 1: History and development of FSI 1 The Australian financial system An understanding of how the Australian financial system operates is important to understanding your place and role in the system, and how facets and functions of the system impact your work and your ability to satisfy client needs. 1-1 The Australian financial system consists of individuals, households, businesses and governments that come together as spenders, savers, borrowers, lenders or investors. They meet in the financial marketplace and conduct their transactions via financial intermediaries. The financial system makes the transfer of funds and financial assets between savers and borrowers possible. 1.1 The primary functions of a financial system A financial system: enables transactions to take place without reliance on the process of barter (the exchange of one set of goods for another without the use of money or currency) facilitates the transfer of funds and financial assets between savers and borrowers assists investors to balance risk, liquidity and returns. It is essential for a financial system to efficiently: provide a payment mechanism that is effective and provides certainty fully mobilise savings channel those savings into fields of investment that generate the highest return consistent with the risk involved offer a suitable range and diversity of financial instruments and intermediaries operate at minimum cost of resources used per unit of service provided. To determine the extent that the Australian FSI meets these essential requirements, it is necessary to deconstruct the industry’s component parts and analyse the role that each plays. The four component parts are: household financial activity financial services providers (e.g. banks, non-bank financial institutions and insurance companies and private lenders) financial services personnel regulatory controllers of the FSI. Figure 1 Components of a financial system Household activity Personnel Providers Regulatory controls Document classification: Confidential © Kaplan Education Pty Ltd 1-1.5 Certificate IV in Finance and Mortgage Broking 2 History of FSI in Australia This section contains a brief history of some of the major developments in financial services in Australia over recent decades, focusing on the major trends in regulation and deregulation and the development of Australia’s main financial institutions. 2.1 1960–1970s Central banking functions were performed historically by the Commonwealth Bank of Australia. The Reserve Bank of Australia (RBA) opened for business on 14 January 1960. It had 1,800 staff from the Commonwealth Bank, including the Governor Dr HC ‘Nugget’ Coombs. The RBA also maintained the same board and, importantly, the same charter as the Commonwealth Bank. 2.2 1970–1980s Australia was one of the first countries to embrace financial deregulation, or the process of removing or reducing state regulations, in the 1970s. The removal of interest rate ceilings on bank deposits in 1980 marked the start of deregulation. Direct controls over banks were largely abolished in the early 1980s. By the mid-1980s, Australia had largely deregulated its financial markets. 2.3 1990s The ‘four pillars’ policy was adopted by the Keating Government to maintain the separation of the four largest banks in Australia by rejecting any merger or acquisition between the four major banks. Originally this policy covered the big four banks (Commonwealth Bank, Westpac, NAB and ANZ) and two insurers (AMP and National Mutual). Keating believed this arrangement would ensure a competitive banking market. 2.4 The Wallis Report In 1996, the Australian Government established the Financial System Inquiry, with Stan Wallis as chair, to provide a stocktake of the results arising from the deregulation of the Australian financial system in the 1980s. The resulting report is commonly referred to as the ‘Wallis Report’. The Wallis Report proposed some fundamental changes to financial regulatory arrangements to increase the efficiency and effectiveness of the system and build on the existing achievements of financial deregulation. Among the major recommendations, the Wallis Report recommended: formation of a single prudential regulator, the Australian Prudential Regulation Authority (APRA), to provide integrated and consistent supervision of financial institutions for safety purposes for the entire financial system bank supervision be taken away from the RBA and given to APRA the Australian Competition and Consumer Commission’s (ACCC’s) role is to prevent market failure through anti-competitive behaviours dismantling of the ‘four pillars’ policy. 1-1.6 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Wallis’s three fundamental drivers — changes in customer needs, changes in skills and technologies, and changes in regulation — were implemented. However, the four pillars policy remained. The structure of financial regulation was introduced in 1998. 2.5 Present day The RBA retains its central banking functions, including responsibility for most payment 1-1 systems and setting of monetary policy. However, its involvement with the banking sector has declined compared to previous decades. Regulation of the financial system in Australia is split mainly between: Australian Securities and Investment Commission (ASIC) responsible for: – market integrity – consumer protection – the regulation of investment banks and finance companies APRA responsible for: – the licensing and prudential supervision of authorised deposit-taking institutions (ADIs) – life and general insurance companies – superannuation funds. All financial institutions regulated by APRA are required to report periodically to APRA. APRA has issued capital adequacy guidelines for banks, which are consistent with the Basel II guidelines. Investment banks (that do not otherwise operate as ADIs) are neither licensed nor regulated under the Banking Act 1959 (Cth) and are not subject to the prudential supervision of APRA. However, most investment banks are required to provide statistical information to APRA. ASIC regulates anti-competitive behaviour. All of these regulators are independent statutory authorities without direct oversight by a government department. For more on these financial institutions see ‘Topic 1-2: Legislation and codes of practice’. 2.6 Financial System Inquiry In recent years there have been two major inquiries into the Financial Services Industry: In 2013 a Financial System Inquiry, headed by David Murray, was announced by Treasurer Joe Hockey. This Inquiry reported on: – how the financial system can more efficiently allocate Australian-sourced capital to minimise exposure to volatility in global capital markets – how Australia can best balance competition, innovation and efficiency, with stability and consumer protection – the role and impact of new technologies, market innovations and changing consumer preferences – international integration, including international financial regulation. In December 2017 a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established by the federal government. The government released the Final Report on Monday 4 February 2019. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.7 Certificate IV in Finance and Mortgage Broking Apply your knowledge 1: Government response to the Final Report of the Banking Royal Commission Download the government response to the Banking Royal Commission at: , viewed 22 October 2022. What were some of the key points from the government’s response to the Banking Royal Commission? Note: You can access ‘Suggested answers’ for this activity at the end of this topic. Further resources: History of FSI in Australia Council of Financial Regulators n.d., History, Council of Financial Regulators, viewed 1 October 2022,. Parliament of Australia 1997, The Wallis report on the Australian financial system: Summary and critique [online], research paper 16, Parliament of Australia, viewed 1 October 2022,. Reserve Bank of Australia (RBA) n.d., Fifty years of the Reserve Bank, RBA, viewed 1 October 2022,. 1-1.8 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy 3 The Australian lending industry The lending market can be divided into two main sectors or markets. These are the: retail sector, mainly comprising of individuals who borrow money to fund purchases of houses, cars or consumer goods business sector, or the commercial lending market, where borrowers range from individuals and small businesses to international corporations. Commercial lending has a much wider range of purposes, including equipment finance and 1-1 debtor funding. 3.1 Credit Credit refers to a person or entity providing another person or entity with financial resources that do not need to be repaid immediately. Instead, an arrangement is made to return the financial resource later, either in one transaction or over a number of transactions. The provision of the financial resource creates a ‘debt’. The financial resource does not necessarily have to be money. The debt can be created through the: provision of goods and services (e.g. hire purchase and lease arrangements) or non-monetary financial resources (e.g. guarantees and underwriting commitments). The creditworthiness (or reputation) of the person or entity taking on the debt is significant and may impact on: the terms and conditions that apply to the credit offered the amount of return (or interest) the credit provider expects for the degree of risk involved whether credit is indeed available to the particular person or entity. 3.2 Lending Lending refers to making a wide range of secured and unsecured loans available to consumers and other borrowers for a range of purposes. Retail lending can include the provision of funds for the purchase of cars, boats, household items, travel and even medical or dental expenses. Mortgage lending usually refers to the provision of funds for houses and other real estate. Forms of lending and loan products are discussed in more detail later in this topic. 3.3 The lending market in Australia The Australian Bureau of Statistics (ABS) prepares a number of estimates of the size and nature of the financial services sector in Australia. Table 1 shows a breakdown of borrowings in Australia as at July 2022, with a comparison to the previous month and year percentage change. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.9 Certificate IV in Finance and Mortgage Broking Table 1 Australian new borrowings July 2022 (seasonally adjusted) Jul 2022 Month percentage Year percentage ($b) change (%) change (%) Households Housing 28.35 –8.5 –11.3 Owner occupier (a) 19.08 –7.0 –15.9 Investor (a) 9.30 –11.2 0.0 Personal Fixed term loans 2.10 7.7 7.2 Businesses Construction 1.48 –35.4 –38.4 Purchase of property 8.18 40.2 2.5 Loan commitments for owner occupier, investor housing and personal fixed term loans exclude refinancing. Source: ABS 2022 as at July 2022. As Table 1 indicates, lending for owner-occupied housing forms a significant proportion of all lending and the majority of retail lending in Australia. Home ownership in Australia Australia has a higher rate of home ownership than in many other parts of the world. In fact, owning your own home has long been thought of as the ‘Australian dream’ and considered an integral part of the Australian lifestyle. Housing satisfies our basic, essential needs for shelter, security and privacy. The adequacy of housing is an important component of individual wellbeing. Investment in housing For most people, ownership of real estate also represents financial security. Many Australians now look to ownership of investment property as a means of wealth creation, a way of providing for their retirement and, if possible, providing for their children’s future. Australians continue to hold significant investments in land and housing. Refer to the further resources below for current data and information on the Australian housing market. Further resources: Housing in Australia Australian Bureau of Statistics (ABS) 2022, Housing occupancy and costs, 2019–2020 financial year, viewed 22 October 2022,. Reserve Bank of Australia (RBA) 2022, Statement on monetary policy — February 2021, RBA, viewed 22 October 2022,. 1-1.10 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Part 2: Who are the stakeholders in the FSI? The stakeholders in the FSI include: financial services providers service users regulators advisers. 1-1 4 Financial services providers Financial services providers are entities directly involved in the transfer of funds between borrowers and savers. They harness the savings of the community, making these funds available to fuel the economy. They are an essential element in the efficient allocation of financial resources for productive purposes. Financial services providers are often referred to as financial intermediaries. This is because they are essentially creating a marketplace where groups of people with varying financial needs and requirements gather. This activity creates a mutually beneficial relationship between borrowers and credit providers, and provides access to markets that individuals and groups could not otherwise enter. 4.1 Types of financial service providers The major financial service providers in the Australian FSI are shown in the table below. Table 2 Types of financial service providers Financial service provider Description Banks A financial intermediary that accepts deposits and channels these funds into lending activities. A bank links together customers with capital surpluses (i.e. want to deposit funds) with customers that have capital deficits (i.e. want to borrow funds). In Australia, banks must hold a banking licence. Non-bank financial institutions Non-bank financial institutions include: Financial institutions such as credit unions and building societies that are deposit-taking institutions but do not hold a banking licence. Other financial institutions such as insurance companies, money market corporations, fund managers, finance companies, trust companies and private credit providers, which are generally not deposit-taking institutions and do not hold a banking licence. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.11 Certificate IV in Finance and Mortgage Broking 4.2 Banks Banks have traditionally been the dominant institutions in the financial sector and are held in a position of special confidence by the public. The collapse of a bank would undermine public confidence in the entire financial sector and have severe repercussions. As a measure of protection against a collapse, banks: place the interests of depositors ahead of those of shareholders, thus absorbing some of the risks of default spread the risk of loan default among all depositors and shareholders pool and utilise depositors’ funds use their expertise for conducting transactions. The payments system The importance of the banking sector is equally reflected by its role in the payments system and the scale of banking operations. Banks play an essential role in settling debt in Australia via cheques or cash. Banks indirectly bear the cost of organising the distribution of notes and coins to meet the demand for currency, as well as the associated transport and security costs. They also have a right to issue cheque accounts. Although non-bank groups are now able to provide cheque accounts to clients, banks remain the dominant providers of this facility. Deposit facilities Banks are an important repository for savings of both households and businesses. They offer a diverse range of deposit facilities, such as: traditional passbook savings accounts that pay relatively low rates of interest term deposits, usually offering slightly higher interest rates cash management type accounts offering rates of interest linked to money market rates offset accounts, where deposited funds are offset against a client’s home loan for the purpose of calculating loan interest. Commercial bill financing Commercial bills are negotiable, short-term, unsecured promissory notes issued in bearer form (a security payable to the person possessing it), usually on a discount basis to raise working capital for any term up to 180 days. Commercial bill financing has been an increasingly important area of bank activity. Bank involvement typically takes one of three forms. The bank can: accept the bill endorse the bill, or discount the bill. Borrowers can issue bills without the involvement of banks, but if they arrange for banks to either accept or endorse the bills, they are normally able to issue them at a comparatively favourable rate. This is because of the banks’ superior credit rating and the fact that there is an established liquid market for bank-endorsed bills. 1-1.12 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Borrowing Individual borrowing needs can be met by many of the same facilities that service their transaction needs. Credit cards or overdraft facilities can be used for short and medium-term borrowings, while long-term borrowings can be met by bank loans and mortgages. Many banks have redraw, offset and line of credit facilities linked to mortgages. This allows the client’s equity in the property to be loaned back to the client as a source 1-1 of credit with the mortgaged property as security. The advantage of this is that while the money is sitting in the mortgage account, it is reducing interest payments and is still accessible. Mortgages have traditionally been made at variable interest rates that fluctuate during the term of the mortgage according to prevailing interest conditions. Fixed rate mortgages are popular in a market where rates are rising and are less popular in a market where rates are falling. By fixing interest rates, clients know exactly how much they need to repay each month. This provides some protection against a potential increase in home loan rates. Insurance Banks are able to provide the full range of general insurance and life insurance products to their clients. In some cases, the bank is directly associated with an insurance company by way of acquisition or merger. In other cases, banks onsell the insurance products of other organisations. These banks act as intermediaries or agents of the insurance company, usually receiving a fee for their services. Savings and investments Banks offer a wide variety of products and services to short, medium and long-term savers and investors. These range from passbook savings accounts offering low rates of interest, small fees and significant transaction services to a variety of managed investments catering for all investor profiles. Other services offered by banks Banks may also provide a number of other services, including: transaction facilities, such as funds transfer via loans and credit facilities non-financial services, such as the provision of safety deposit boxes and travel agency facilities. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.13 Certificate IV in Finance and Mortgage Broking 4.3 Non-bank financial institutions The Australian financial system includes a range of non-bank financial institutions, such as: building societies credit unions finance companies investment banks insurance companies. Building societies Building societies provide: mortgage finance for owner-occupied housing funds for the residential investment market. They collect funds mainly by tapping into household savings. Since the mid-1980s, building societies have sought to increase the range of services they offer in order to maintain market share. Examples of new services include the issuing of credit cards and the provision of current account deposit facilities through the establishment of agency arrangements with a trading bank. Due to the need to achieve economies of services and networks, there has been a trend for building societies to merge with existing banks. Building societies also make use of third-party mortgage origination. Credit unions Credit unions are cooperative organisations owned by their members and run on a non-profit basis. They concentrate on meeting the financial requirements of members, providing avenues for investment and borrowing. Credit unions differ from building societies in two main respects: Membership is limited to those with some common bond, for example, people working in the same industry. However, with the amalgamation of different credit unions, these bonds are less prevalent and most people would now qualify to join a credit union. Lending to members is for more general purposes than housing. Common purposes include the purchase of cars, holidays and boats. Finance companies Finance companies provide various types of loans to consumers and the business sector. Most loans to consumers are for the purchase of consumer durables over relatively short terms. Lending to the business sector includes: lease financing other commercial loans, including loans for non-residential property investment, generally for short- to medium-term periods. Finance companies represent an alternative for individual and business savings because funds required for lending are borrowed from the public, mainly by way of debentures, notes and deposits. 1-1.14 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy As a general rule finance companies are not big credit providers of mortgage finance for residential purposes. They normally provide finance for consumer goods, home improvements, commercial property, leasing and factoring. Companies that lend for residential property usually specialise in non-conforming lending to borrowers who may not be able to obtain mortgage finance from traditional credit providers because of credit impairments, such as a history of bankruptcy or loan delinquency, or other circumstances. This sector, as with the other sectors of the finance industry, is constantly evolving. 1-1 Many finance companies are owned by one of the major banks and over time some have been absorbed by the parent bank. Examples of finance companies that are operating or have operated in Australia include: Prospa Capital Finance ORIX Australia Latitude Financial Services. Investment banks Investment banks operate in the wholesale space of the financial markets — they are the intermediaries between companies issuing securities to raise funds and the investors who buy these securities. They perform an important intermediary role, channelling sizeable parcels of funds to large private corporations and government agencies, and are an important channel through which overseas capital is brought into Australia. Investment banks deal in private and government securities, acceptance of bills, underwriting issues of debt and equity capital, and devising innovative finance packages for corporate clients. Investment banks are not subject to the same regulation as ordinary banks and do not accept deposits from the public as ordinary banks do. They derive their income from fee-based activities or trading securities rather than from a margin between borrowing and lending costs. Some Australian banks also function as investment banks. On the other hand, Macquarie Bank, the nation’s largest Australian investment bank, has significantly expanded its presence into retail banking activities. Organisations such as Macquarie Bank constantly review their activities in light of the current and anticipated economic and financial environment. Insurance companies There have been substantial changes to the role played by life insurance companies, which have occurred primarily through changing legislation, changing needs and increased competition. This competition has led to a greater variety of products being offered to consumers than before, for example, investment, retirement and savings plans, as well as a variety of insurance products for businesses. See also ‘Insurance’ in Part 3, section 9.3. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.15 Certificate IV in Finance and Mortgage Broking 5 Service users 5.1 Consumers and customers According to Dictionary.com (2021), a: consumer is ‘a person who acquires goods and services for his or her own personal needs’ customer is ‘a person who purchases goods or services from another, buyer, patron’. It is hard to imagine any adult Australian that is not a consumer of the FSI at some level. For example, all adult persons require at least a bank account to operate in a modern economy. Most Australians have significantly more complex financial dealings with credit cards, investments, home loans and superannuation accounts, all of which requires interaction with the FSI. Consumer rights in terms of the FSI will be covered in more detail in ‘Topic 1-2: Legislation and codes of practice’. 5.2 Business Each financial services institution is a business in its own right and subject to the economic forces and regulations and laws to which all other businesses are subject. Business is also an important customer of the FSI. Without access to investment capital and credit, businesses are not able to function. Sufficient working capital allows a business to: pay for short-term liabilities such as purchase of raw materials or payment of pay salaries, wages and overheads or other operating expenses operate smoothly and maintain solvency by providing uninterrupted flow of production maintain a good credit rating, thus enabling further credit where required manage through difficult times or emergencies. Business is an important generator of wealth and employment within the economy of a country. When businesses are healthy, the economy thrives, providing employment and opportunities. 5.3 Government Government’s role in the workings of the financial service industry is as a: law and policy maker, enacting legislation that directly influences the FSI. For more information, see: – ‘Legislation’ in Part 4, section 10.1 – ‘The Australian Government Treasury’ in Part 4, section 10.2 – ‘Government inquiries and commissions’ in Part 4, section 10.3 regulator, where government organisations and agencies regulate the businesses in the FSI. For more information, see ‘Regulators’ in Part 2, section 6. 1-1.16 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy 5.4 Not-for-profit organisations A not-for-profit (NFP) organisation is one that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends. While NFP organisations are permitted to generate surplus revenues, they must be retained by the organisation for its self-preservation, expansion, or plans. NFP organisations may resemble any other type of business in structure. Typically, a NFP may have a business-like governance structure with a board or chief 1-1 executive officer (CEO). NFPs may employ staff, undertake projects and collect revenue. However, they may also accept charity donations, use volunteer employees and have a different taxation status compared to other businesses. As with any business, NFPs need to have internal financial management policies and procedures in place in order to be able to meet financial obligations and prevent fraud. Further resources: Not-for-profit organisations For more information about Australian Charities and NFP and tax status of NFPs, see: Australian Charities and Not-for-profits Commission n.d., Australian Government, viewed 22 October 2022,. Australian Taxation Office (ATO) 2021, Getting started, ATO, 29 March, viewed 22 October 2022,. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.17 Certificate IV in Finance and Mortgage Broking 6 Regulators The table below shows the main regulators of the FSI. Table 3 Regulators Institution Description Auditing and Assurance Standards Board The AUASB is an independent statutory agency (AUASB) responsible for developing standards and guidance for auditors and providers of other assurance services. Australian Accounting Standards Board (AASB) The AASB makes accounting standards for the private, public and NFP sectors and participates in the formulation of international accounting standards. It is subject to broad oversight by the Financial Reporting Council (FRC). Australian Financial Security Authority (AFSA) Responsible for the administration and regulation of the personal insolvency system, proceeds of crime, trustee services and the administration of the Personal Property Securities Register (PPSR). Australian Prudential Regulation Authority APRA is the prudential regulator of banks, (APRA) insurance companies and superannuation funds, credit unions, building societies and friendly societies. Australian Securities and Investments ASIC is an independent government body that enforces Commission (ASIC) and administers corporations law and consumer protection law for investments, life and general insurance, superannuation and banking (except lending) throughout Australia. Their purpose is to reduce fraud and unfair practices in financial markets and financial products so consumers use them confidently and companies and markets perform effectively. Australian Transaction Reports and Analysis Australia’s anti-money laundering and counter-terrorism Centre (AUSTRAC) financing regulator and financial intelligence unit. They oversee compliance by a range of financial services providers, the gambling industry, bullion dealers and remittance service providers. They also provide financial information to Australian law enforcement and revenue agencies. Financial Reporting Council (FRC) The FRC is a statutory body responsible for providing broad oversight of the process for setting accounting standards in Australia and giving the finance minister reports and advice on that process. Australian Securities and Investments ASIC publication website for notices on insolvency and Commission (ASIC) Published notices other matters. It provides a single point for searching almost all notices on external administration and company deregistration, formerly advertised in the print media. Standard Business Reporting (SBR) SBR is a multi-agency initiative that will simplify business- to-government reporting. Source: Australia.gov.au, viewed 22 October 2022. The roles and responsibilities of regulators will be covered in more detail in ‘Topic 1-2: Legislation and codes of practice’. 1-1.18 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy 7 Advisers 7.1 Financial planners and advisers A financial adviser is someone who is licensed to provide financial advice. A licensed adviser may also be called a financial planner. 1-1 Financial planners and advisers are professionals who provide advice to help their customers: set and achieve financial goals make the most of financial assets get any appropriate government assistance to which the customer is entitled protect the customer’s financial assets. Further resources: Financial planning changes Recent changes in the law have changed the rights and responsibilities of financial advisers. For more information, see: Australian Securities & Investments Commission (ASIC) 2022, Future of financial advice reforms, ASIC, viewed 1 October 2022,. MoneySmart 2022, Financial advice, Australian Securities & Investments Commission, viewed 22 October 2022,. 7.2 Mortgage brokers There are many financial institutions offering credit and mortgages. Many customers are confused by the choice and decide to get a finance or mortgage broker to do the legwork in choosing a credit provider and a mortgage product most suitable for their circumstances. A finance broker negotiates with banks, credit unions and other credit providers on the customer’s behalf to arrange loans or credit packages and arrange special deals. A mortgage broker is someone who specialises in home loans. Credit providers and brokers must be licensed to operate in Australia. Finance or mortgage brokers can: offer a variety of loan options or products assist a customer to select a loan manage the loan negotiation process through to settlement. The credit provider will often pay the broker’s fee or commission for arranging the loan based on the product sold. Sometimes a broker will charge the customer a fee directly (instead of or in addition to the credit provider’s commission). For more about mortgage brokers see ‘Topic 1-3: Products and services’. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.19 Certificate IV in Finance and Mortgage Broking 7.3 Stockbrokers MoneySmart outlines that there are five public share exchanges in Australia. Four of them directly supervise the companies that issue the shares that trade on their markets. The fifth exchange, Chi-X, currently only provides the infrastructure for trading shares already quoted on the Australian Securities Exchange (ASX). The five exchanges are: ASX — the main securities exchange in Australia Chi-X — an exchange that trades company shares already quoted on ASX but does not list or supervise the companies National Stock Exchange of Australia (NSX) — a securities exchange that lists about 70 small to medium-sized companies SIM Venture Securities Exchange (SIM VSE) — an exchange for innovative companies involved in the clean technology, renewable energy and bioscience field Asia Pacific Stock Exchange (APX) — a securities exchange with a focus on growth oriented companies from the Asia-Pacific region. A stockbroker is a professional, usually associated with a brokerage firm, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission. A customer can invest in stocks and shares by using: an online broking service where a customer trades shares based on their own investment decisions, paying a minimal fee starting at $30 per trade a full service broker, providing investment advice and recommendations and charging a percentage of the value of the sale. The law requires brokers to have a reasonable basis for any recommendations made and tell customers about any conflicts of interest. 7.4 Accountants Accountants are qualified professionals trained in bookkeeping and in preparation, auditing and analysis of accounts. Accountants prepare tax returns, annual reports and financial statements for planning and decision making, and advise on tax laws. For most Australians, an accountant is a registered tax agent engaged to assist them with their tax return each year. However, accountants can also be engaged to provide advice on more complex financial situations. Accountants may also be able to help customers with investment issues provided they have an Australian financial services licence. Most businesses require the services of an accountant or bookkeeper because there are specific laws about the records that businesses need to keep. 1-1.20 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Part 3: Which services does the FSI provide? 8 The primary functions of a financial system A financial system: 1-1 enables transactions to take place without reliance on the process of barter (the exchange of one set of goods for another without the use of money or currency) facilitates the transfer of funds and financial assets between savers and borrowers assists investors to balance risk, liquidity and returns. It is essential for a financial system to efficiently: provide payment mechanisms that are effective and secure mobilise savings channel savings into fields of investment that generate the highest return, consistent with the risk involved offer a suitable range and diversity of financial instruments and intermediaries operate at minimum cost in terms of resources used per unit of service provided. 9 Types of financial services The main types of financial services fall into five categories: transaction (spending) borrowing (credit) insurance saving investment. 9.1 Transaction (spending) Spending occurs when goods or services are purchased to satisfy an immediate need. Spending reduces the finances available for other financial activities. Levels of household spending are influenced by a variety of factors — the main factors are the level of household income, the cost of the consumer goods and the attractiveness of alternative activities. There is a direct link between household spending and household saving, with household spending normally increasing or decreasing in inverse proportion to saving. A transaction is an activity involving the purchase of goods or services in exchange for money or some other form of negotiable entity. Households and individuals have a variety of transactional needs varying from the immediate need for comfort or sustenance to the long-term need for security or a permanent residence. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.21 Certificate IV in Finance and Mortgage Broking Transactions may be: spontaneous made in instalments over a period of time fully in arrears although the goods or services are available immediately. Payment in arrears normally occurs with essential services such as gas, water, electricity and telecommunications, where the user is sent an invoice for previous consumption. It also includes most hire purchase arrangements, and buying goods through regular payments over a period. Transaction services are the lifeblood of the economy, allowing businesses to grow and prosper, and for money to circulate. Most small businesses rely exclusively on transaction needs to generate income. 9.2 Borrowing (credit) In the financial sense, borrowing is obtaining the temporary use of money while incurring the obligation to pay it back, usually with interest. Borrowing can be used to finance other types of financial activity. By borrowing, a particular household transaction may occur sooner than if it were to be funded purely from income and savings. Levels of borrowing are influenced primarily by the cost of borrowing, which is normally measured by reference to prevailing interest rates. Generally, the higher the interest rates, the lower the levels of borrowing and vice versa, although specific economic conditions can have an influence on this theory. The need to borrow money (or obtain credit) normally arises due to a situation where the individual has: not saved sufficient funds to meet the cost of a purchase that they are not prepared to delay until the funds are accumulated the funds available to meet the purchase but the means of accessing those funds is not available immediately and the purchase is therefore made by means of credit both the funds and the means of access available to make the purchase but prefers, for reasons of their own, to fund the purchase through borrowing. Borrowing and credit enable individuals to maintain a less volatile consumption pattern. When there are excess funds, saving and investing is possible. When funds are in short supply, borrowing is an option. The financial system allows a stable standard of living to be maintained because needs arising during both the peaks and troughs in income and expenditure are met. The diagram below shows that over time, as a household’s consumption patterns change, such consumption can be funded from either savings or borrowings. 1-1.22 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Figure 2 Household consumption patterns Monthly household expenditure Expenditure ($) 1-1 Monthly household income Time (months) The availability of borrowing facilities, such as mortgage redraws, overdrafts, credit cards and personal loans, enables consumers to access cash and/or consumer goods more readily than if they had to save to pay for their purchases. While this affords a less volatile consumption pattern, it can sometimes land consumers in financial difficulty. 9.3 Insurance Insuring is a method of managing the risk of loss or damage to an individual or property by transferring the risk to an insurance company in return for payment of a premium. It allows households to outlay relatively small sums of money on a regular basis to protect against an event that, should it occur, would result in some degree of financial hardship. Insurance is often the only financially viable option for protecting an individual’s assets, including their life, from the financial consequences of loss or damage. The concept of spreading risk is the basis on which the insurance industry is founded. By pooling premiums, a reserve is created to compensate those who suffer a loss. In essence, insurance allows people to live their lives and conduct their financial affairs in confidence and with peace of mind because of the protection it affords. Without insurance, the occurrence of unexpected and tragic events could effectively leave an individual or business financially destitute. The threat of this possibility would have a negative effect on the way people conduct their lives and create a large degree of insecurity, thus affecting their quality of life. The nature of insurance is to pool premiums to allow claims to be met according to actuarially calculated probabilities. The result is to create large funds over and above the amount needed to meet the normal level of claims. These large pools of funds serve a vital purpose in the financial system as a major source of investment funds. Insurance companies invest funds in equities, fixed interest, property, cash and unit trusts, thus meeting the short-, medium- and long-term financial needs of the community. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.23 Certificate IV in Finance and Mortgage Broking Types of insurance Some insurance is compulsory, such as compulsory third party (CTP) motor vehicle insurance, while other insurance is voluntary and dependent on individual circumstances. Insurance needs fall into one of three categories: life insurance (e.g. income protection) general insurance (e.g. car insurance and house insurance) commercial insurance (e.g. business insurance). Within each of these categories, there is a range of insurance products covering a variety of specific risks. General and life insurance The table below defines general and life insurance. Table 4 General and life insurance Insurance type Description General insurance General insurance is the purchase of a promise to pay for or make good loss or damage to persons or property for which one is liable. Although the types of assets insured may have changed over time, the concept and operation of general insurance business has largely remained static. A general insurance contract is usually referred to as a ‘policy’. It contains the terms of agreement between the insurer and the insured. General insurance includes motor vehicle domestic home (contents and dwelling) personal effects (jewellery and works of art) personal liability insurances. Life insurance Apart from covering property and asset risk through a range of general insurance products, insurance companies also offer insurance against personal risk, including the potential loss of income or assets that may arise as a result of illness, injury or death. These products are collectively referred to as life insurance. In the event of a successful claim, the benefits range from lump sum payments made to individuals under trauma and permanent disability insurance to regular monthly benefits paid for temporary incapacity under income protection insurance. 1-1.24 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Types of life insurance The table below defines types of life insurance. Table 5 Types of life insurance Insurance type Description Term life insurance This insurance provides payment in the event of the death of the life insured within a specified term. It is based on an annual premium that contains 1-1 no investment component. When the policy is cancelled or lapses, there is no surrender (cash) value. A terminal insurance benefit may also be paid if the insured is diagnosed with less than 12 months to live. Total and permanent TPD insurance will be paid as a lump sum if the life insured suffers a disability disability (TPD) insurance and becomes totally and permanently disabled. There may be a limit on the amount of TPD cover or it may be any amount up to the term insurance sum insured. TPD insurance is generally taken out with term life insurance (termed a ‘rider’) and is usually not more than the term insurance policy sum. Trauma (or critical illness) Trauma insurance is a type of disability insurance and is usually effected as an insurance extension (or rider) to a life insurance policy. Trauma insurance will provide a lump sum payment to the policy owner on the diagnosis of one of several specified medical conditions or injuries (e.g. cancer, stroke, heart attack and paraplegia). Policies differ in the types of medical conditions covered and their definitions of these. Disability income This insurance provides the policy owner with a replacement income after a (income protection) specified waiting period, for example three months, should the insured be insurance unable to earn an income due to injury or illness. The maximum benefit payable is usually 75% of the insured’s gross earnings. Premiums payable are usually tax deductible. Whole-of-life insurance This insurance protects the life insured against the risk of premature death over an entire lifetime. In return for periodic or level premiums, the policy owner receives the face value of the life insurance contract plus accrued bonuses on the death of the life insured or on the maturity of the policy. Thus, there is certainty that if the policy owner continues premium payments, the insurance company will make a payment regardless of whether the life insured lives or dies. Whole-of-life insurance has a savings element as well as an insurance element. Endowment insurance This insurance is very similar to whole-of-life insurance in that it combines an insurance element with a savings element. Endowment policies, however, mature at a date set by the policy owner at the commencement of the policy. They guarantee a payout on death or to the policy owner if the life insured is still alive on the policy’s maturity date, which must be set at a minimum of 10 years from the date of commencement. There are many existing whole-of-life and endowment policies still held by clients, although few insurance companies currently issue these policies. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.25 Certificate IV in Finance and Mortgage Broking Insurance needs Insurance needs may be short term, medium term or long term as shown in the table below. Table 6 Insurance needs Insurance type Description Examples Short-term insurance Where the risk is temporary because the travel insurance circumstances that create the risk are for a limited period. Medium-term insurance Where the insurance contract: house insurance has a fixed term, normally one year vehicle insurance is renewed if the risk continues. term life insurance Premiums may rise and fall each year based trauma insurance on a variety of circumstances. income protection insurance Long-term insurance These insurance policies: whole-of-life insurance incorporate both a life insurance and an endowment insurance investment component are normally for a term of at least 10 years if cancelled prior to the end of the term may involve some financial loss in the investment component. 9.4 Saving Saving is the accumulation of surplus funds as a result of thrift. Household saving is an essential ingredient in wealth creation, both at an individual and national level. Increasing the level of household saving is normally a central theme of government fiscal and monetary policy. Savings provide the lubricant of the economy, enabling it to operate efficiently and to grow. The ability of individuals to save is determined primarily by the level of household income and level of expenditure. Normally, higher income earners are able to set aside more of their income as savings compared to those who are barely able to purchase life’s necessities. The age of the individual also has an influence on the inclination to save, the type of saving undertaken and the percentage of income set aside for this activity. The nearer one is to retirement, the greater the percentage of savings required to ensure financial security in retirement. Household and individual savings are traditionally fundamental to the financial system. However, it could be argued that overseas investment and wholesale funding are now probably just as important. The essential factor is that only through the existence of an adequate pool of funds, from savings and other sources, can investments be funded and ensure the growth of the economy. The table on the following page describes short-, medium- and long-term saving. 1-1.26 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Table 7 Saving Saving type Description Examples Short-term Short-term saving normally occurs as an alternative to Short-term saving needs saving borrowing/credit to fund a purchase. These items can be might include an purchased on credit but the individual is prepared to delay the individual putting aside a purchase of the item until they have sufficient cash to fund the certain amount each purchase. week to purchase a new Short-term saving normally occurs through a bank account or suit, a computer or a similar secure ‘at call’ investment vehicle. widescreen TV. 1-1 Medium-term Medium-term saving normally takes place in an interest-bearing Medium-term saving saving deposit account in a bank or similar financial institution, needs include: although it might also occur through a term deposit or similar education product. travel The individual must decide whether they can delay the home renovations purchase of the particular item until they are able to pay for it cars. in full. Long-term Long-term saving needs are usually related to saving for Superannuation is the saving retirement. vehicle used by most At 31 March 2014, the Association of Superannuation Funds of individuals to Australia (ASFA) estimates superannuation assets, including the accommodate their assets of self managed superannuation funds and the balance of retirement saving needs. life office statutory funds, to be $1.84 trillion (ASFA 2014). These accounts represent a major source of investment funds within the Australian financial system. 9.5 Investment Investing is the use of savings to make money grow and/or to increase income through the purchase of capital goods. The essential difference between saving and investing is that saving is primarily a result of restraining from spending, while investing is the utilisation of accumulated funds to purchase wealth creation vehicles. Capital formation through transforming savings into the physical investments of the economy is the central task of any financial system. Investing involves the purchase of financial assets that are expected to produce a return or series of returns over time. By investing, an investor hopes that the return they receive will compensate them for: forgoing the use of their funds for immediate consumption the eroding effect of inflation, which ‘eats away’ at the value of money taking a risk, as most investments do not guarantee returns. Wealth creation is the major motivation driving financial systems, although how it is achieved varies considerably. Different types of investments are classified according to asset classes. Asset classes are normally divided into four groups: cash fixed interest property equities (shares). Document classification: Confidential © Kaplan Education Pty Ltd 1-1.27 Certificate IV in Finance and Mortgage Broking Investments may be owned directly in an individual’s name or they may be a managed investment, often in the form of a managed fund or managed trust, where the investor’s money is pooled with that of others, normally in more than one underlying asset class. The table below outlines short-, medium- and long-term investment types. Table 8 Investment Investment type Description Examples of products Short-term A short-term investment is an investment Products available to meet the needs investment showing a return over three years or less. of short-term investors are: Short-term investment needs normally fall into savings accounts one of two categories: cash management trusts to accumulate a certain sum of money within a term deposits relatively short time, normally less than three government (Commonwealth) years, through regular small investments and semi-government to maximise the growth of a single investment (state government) bonds and over a period of less than three years. securities Often it is difficult to determine whether a company loan securities short-term investment is actually an investment (e.g. debentures, secured and or a savings activity. For example, while regular unsecured notes). contributions made by a young couple to a bank Derivative products, such as futures or cash management account to accumulate the and options contracts, may also be deposit for a home loan may have the included in this category. However, characteristics of an investment, in reality the these are considered to be more activity is more like saving. However, it can be speculative investment products. viewed as either. The higher the return, the more likely it is that the activity will qualify as an investment. Medium-term A medium-term investment shows a return Investment vehicles to cater for investment between three and 10 years. It might be to fund a medium-term investment needs future goal such as the future cost of a child’s include: university education or future travel. shares The main characteristic of medium-term managed investments investments is that the funds are normally locked (e.g. public unit trusts) away for a fixed period so premature access to property. the funds, while possible, is not normally Some insurance products are also cost-effective. considered good medium-term investments such as: insurance and friendly society bonds, or insurance policies backed by investments that can offer tax benefits if held for 10 years or more endowment insurance. Long-term Long-term investment needs are typically related Long-term investment needs are met investment to the provision of retirement income at the end through the following investments: of an individual’s working life. This is normally shares funded through regular payments into investment properties superannuation funds and the purchase of managed investments income streams, such as pensions and annuities (e.g. unit trusts) either prior or on retirement. superannuation Buying an investment property is a long-term investment, as are the purchase of a share pensions portfolio or investment in a managed investment lifetime annuities (guaranteed) fund. Traditional life assurance, for example whole-of-life insurance. whole-of-life policies, could also be considered a long-term investment. 1-1.28 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Part 4: What is the environment the FSI exists in? The FSI does not operate within a vacuum — as with all businesses, it is impacted by the world in which it operates. This section looks at some of the factors within the environment that affect the FSI and how these impacts are felt. These factors and influences include: 1-1 political media environment economic. 10 Political The government of the day both at the federal and state or territory level has an impact on the FSI in various ways. 10.1 Legislation Legislation enacted by parliament can affect directly and indirectly the policies and practices of the FSI. For example, the Federal Budget legislation, passed annually, has an impact on most Australian businesses. The Budget has profound macro-economic implications because it describes: the Australian Government's planned operations for the following financial year fiscal policy for the forward years expected revenues and expenditures a political statement of the government's intentions and priorities. Other legislation can have a direct impact on FSI, such as legislation to create a financial regulatory body, change or amend regulatory powers for an existing body, or change financial services practices. 10.2 The Australian Government Treasury While the Australian Government Treasury, like all departments, is staffed and managed by public servants, it is presided over by the Federal Treasurer, a member of the government of the day. Treasury is a powerful department, hence the Treasurer is typically a senior member of the government and politically powerful in his or her own right. Politics has a very real and dramatic role in setting the direction of fiscal policy in Australia. Treasury acts to: anticipate and analyse policy issues with a whole-of-economy perspective respond to changing economic events and directions as well as social policy set economic policy for both a micro and macro-economic reform set tax policy support markets and business provide payments to state and territory governments. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.29 Certificate IV in Finance and Mortgage Broking 10.3 Government inquiries and commissions Federal and state governments launch inquiries and commissions at taxpayers’ expense to investigate areas of Australian society or economy and make recommendations. Implementation of the recommendations from the reports of inquiries or commissions can have far-reaching impacts on Australian society, economy and life for the ensuing decades. For more information see: ‘The Wallis Report’ in Part 1, section 2.4 or ‘Financial System Inquiry’ in Part 1, section 2.6. 11 Media Mass media is technology by which information can reach large audiences. Traditional mass media includes television, film, radio, books and newspapers. Although still very important, the role and influence of these media forms has declined in recent years with the rise of the internet, websites, mobile phone technology and social media such as Facebook, Twitter and blogs. The role of the mass media is to: inform people break news stories provide editorial comment and opinion. The mass media is a prime source of financial information. Increasing proportions of various types of media, such as pay and free-to-air TV channels, websites, newspapers, are devoted to providing up-to-date financial data and business news that may impact financial trends. Apply your knowledge 2: Financial services in the media 1. Make a list of the types of media outlets where you obtain information about financial news or matters. Note: You can access ‘Suggested answers’ for this activity at the end of this topic. 2. Comment on your preferences for obtaining information from these sources. Do you find any of these sources more trustworthy, reliable or convenient than the others? Note: As this activity requires an independent response there is no suggested answer for this question. 1-1.30 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy 11.1 Social media Increasingly, all companies use social media to market their products and services, as well as get feedback from customers about how well their products and services are liked. Social media provides a key business voice, a customer service channel and a comprehensive feedback mechanism. Financial services have tended to be slow adopters of social media platforms. In 2012, a survey by Assetinum reported that the majority of banks deal with social 1-1 media clumsily. In recent times, Australian banks have increased their social media footprint. A survey prepared by Financial Marketer in 2017 revealed ‘the Top 20 Australian retail banks social media tracker showed diverse activity across the key social networks being Facebook, Twitter, LinkedIn and YouTube’ (Frith 2017). Further resources: Social media and FSI Frith, A 2017, 20 Leading Australian retail banks most active on social media, [online], Financial Marketer, March, viewed 22 October 2022,. 12 Environment Like all businesses and industries, the FSI has an impact on the physical environment around it. 12.1 Environmental degradation Environmental degradation is the deterioration of the environment through depletion of resources such as air, water and soil; the destruction of ecosystems; and the extinction of wildlife. It is defined as any change or disturbance to the environment perceived to be deleterious or undesirable. It occurs when the earth’s natural resources are depleted, and the environment is compromised in the form of extinction of species, pollution in the air, depletion of water and soil, and the rapid growth of population. Environmental degradation is one of the largest threats that are being looked at in the world today. The United Nations International Strategy for Disaster Reduction characterizes environmental degradation as the lessening of the limit of the earth to meet social and environmental destinations and needs. Further resources: Environmental Degradation Conserve Energy Resources, n.d., ‘Causes, Effects and Solutions to Environmental Degradation’, viewed 22 October 2022,. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.31 Certificate IV in Finance and Mortgage Broking 12.2 Impacts of the FSI on environment While having a relatively low impact on the environment compared to some industries or businesses, the FSI nonetheless has an environmental impact. The construction of residential buildings, commercial buildings and other infrastructure has significant impact on the environment. Direct impacts include: use of land mining of raw materials for use in building construction or maintenance production and use of building materials such as concrete use of energy to produce building materials and construct the building demolition and disposal of the building at the end of its life span. These activities, in turn, lead to greenhouse gas emissions and the production of other wastes. Indirect impacts depend on a range of factors including: location, for example: – whether the building is in an ecologically sensitive area and how the building interacts with the local ecology such as waterways or wildlife – where the building is located – how close the building is to population centres – how workers or customers will travel to the building the potential life span of the building and the use of the building throughout its life span. 12.3 What can be done? The finance sector has the potential to promote the principles of sustainable development through: internal policies and processes, focusing on the adoption of sustainable business practices such as energy efficiency and recycling programs encouraging and supporting the adoption of sustainable growth for all FSI businesses developing environmentally responsible products and services lending insurance and investment activities to: – encourage responsible environmental practices in other businesses and corporations across sectors – develop new technologies to minimise environmental impacts. Internationally, financial institutions have responded by: actively participating in global forums developing and promoting socially responsible investment products ‘greening’ internal operations. For more information see ‘Sustainability in the FSI’ in Part 8. 1-1.32 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy Further resources Monitor Institute 2009, Investing for social and environmental impact, Deloitte, January, viewed 22 October 2022,. PricewaterhouseCoopers 2001, The role of Australia’s financial sector in sustainability, Department of the Environment, 1-1 viewed 22 October 2022,. United Nations Environmental Programme (UNEP) n.d., viewed 22 October 2022,. 13 Economic Like all businesses, the FSI is affected by the prevailing economic conditions both nationally and internationally. In the example below, about the global financial crisis (GFC) of 2007/08, economists consider the lending policies of global financial services institutions to be a cause of the crisis. 13.1 GFC 2007/08 The GFC of 2007/08 was considered by many economists to be the worst financial crisis since the Great Depression of the 1930s, resulting in: the collapse of global financial institutions such as Lehman Brothers the requirement to bailout banks by national governments across the world stockmarket downturns across the world severe decline in personal wealth for many consumers, failure of businesses, widespread housing foreclosures, evictions and widespread unemployment across many developed economies. The immediate trigger of the GFC was the bursting of the US housing bubble, where a rising number of defaults of sub-prime mortgages caused a number of financial institutions to collapse. Easy availability of credit, lax lending standards and rising interest rates also contributed. Davies (2017) reports that ‘the global financial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis’. The downturn in economic activity led to the 2008–12 global recession and contributed to the European sovereign debt crisis. The impacts of this downturn continue to be felt across the world. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.33 Certificate IV in Finance and Mortgage Broking 13.2 Australia and the GFC Australia did not experience a large economic downturn or a financial crisis during the Global Financial Crisis (GFC) between 2007 and 2009. However, the pace of economic growth did slow significantly, the unemployment rate rose sharply and there was a period of heightened uncertainty. The relatively strong performance of the Australian economy and financial system during the GFC, compared with other countries, reflected a range of factors, including: Australian banks had very small exposures to the US housing market and US banks, partly because domestic lending was very profitable. Subprime and other high-risk loans were only a small share of lending in Australia, partly because of the historical focus on lending standards by the Australian banking regulator (the Australian Prudential Regulation Authority (APRA)). Australia’s economy was buoyed by large resource exports to China, whose economy rebounded quickly after the initial GFC shock (mainly due to expansionary fiscal policy). (RBA n.d.). Apply your knowledge 3: Australia following the GFC Read the following articles then answer the questions below. RBA n.d., ‘Australia and The Global Financial Crisis’ Reserve Bank of Australia, viewed 22 October 2022,. Kennedy, S. Dr. 2009, ‘Australia’s response to the global financial crisis’, Australian Government Treasury, 24 June, viewed 22 October 2022,. Davies, J 2018, ‘Global financial crisis — what caused it and how the world responded’, Canstar, 23 June, viewed 22 October 2022,. 1. What were the main consequences of the GFC for Australians? 1-1.34 CFMB_T1-1_IK_v4 Document classification: Confidential Topic 1-1: The industry and economy 2. What are the current areas of economic concern noted by the authors? 1-1 Note: You can access ‘Suggested answers’ for this activity at the end of this topic. Document classification: Confidential © Kaplan Education Pty Ltd 1-1.35 Certificate IV in Finance and Mortgage Broking Part 5: Global economy It is important that lenders develop an understanding of the economic context in which they, and the industry as a whole, operate. Key economic concepts that assist in determining the likely impact of economic change at individual, local, national and international levels are explained below. 14 Top-down analysis As the term top-down analysis suggests, world economic changes eventually flow through to affect the Australian domestic economy and the performance of domestic investments. This is shown in the figure below. Figure 3 Top-down approach to economic analysis International economic analysis Domestic economic analysis Market analysis Market sector analysis Product and services In particular, larger, stronger economies such as the US, China and Germany exert considerable influence on other world economies, including the Australian economy. When evaluating the impact of international economic conditions on Australian performance, eco

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