Finance Report

The Bank of England was founded in 1694 to lend money to the

government to fund the rebuilding of the navy, and other military pursuits
against the French by London merchants and financiers. It was allowed to
be the first incorporated bank in the country, rather than being limited to
6 partners, as all banks were 1826, meaning it could issue shares to raise
finance. It began as a private commercial bank, but was later nationalized
in 1946. The Governor of the Bank of England, currently Mark Carney, is
responsible for the management of the bank, along with the Executive
Team of deputy governors and directors. As a commercial bank and the
central bank of the United Kingdom there are several key functions it
undertakes, including some that it has exclusive rights or duties to.
The Bank of England is exclusively the banker to the government of the
United Kingdom, which is done through the holding of the Exchequer
account through which all incoming and outgoing payments of the
government go. This account is also known as the Consolidated Fund, as it
joins together the areas of the governments accounts[1], as all public
monies (such as taxation) goes in and most expenditure goes from it[2]. It
also handles the National debt through the issue of government securities:
a bond that is issued to be repaid upon maturity[3].
The Bank of England is solely responsible for the issue of notes of legal
tender, and the only legitimate issuer of notes in England and Wales.
Although there are banks in Scotland and Northern Ireland sanctioned to
print notes as legal currency, these are not legal tender and therefore are
accepted for payment at the discretion of the payee[4].
A key function of the Bank of England that separates it from others is its
role in the implementation and management of monetary policy, through
manipulating interest rates and through quantitative easing. The
Monetary Policy Committee is a team of internal and external economic
experts who meet on a monthly basis to determine interest rates. The
committee is formed of the Governor, deputy governors, the banks chief
economist, and four external experts[5], and vote on changes or
maintenance of the rate of interest, except the Governor who will only
vote in the event of a tie. Also a representative from the Treasury attends
meetings and makes presentations, but does not get a vote to keep
monetary policy from being abused by politicians. The bank is also
responsible for quantitative easing which is purchasing securities and
assets from the banks and institutions to increase the money supply and
encourage lending[6].

The Bank of England operates as a bank to the other banks in the UK as

banks wishing to operate here must hold deposits at the bank as a
percentage of liabilities to ensure the means to trade at the level they are,
and to repay savers. As well as this they have operational accounts
through which payments through the clearing system are made. This is to
fund transactions between individuals and banks to settle transactions
that are made on a daily basis. This arises to prevent there having to be a
physical transfer every time a payment is made from one account to
another, so instead they are just transferred from one bank to another but
then taken from or assigned to an account within the bank.
An important function of the Bank of England is its role as a lender of last
resort. In this role the bank offers loans to other banks or financial
institutions experiencing difficulties meeting operating costs or repaying
its lenders or savers. These loans often have a higher rate of interest as
they show a great risk, as to resort to this service an institution would be
suffering great difficulties. It is important to protect individuals against the
collapse of banks, costing them through loss of savings held, and also to
prevent a run on the bank, or panic withdrawing, where savers all rush to
withdraw their funds as a bank runs into financial trouble, meaning the
problem is exacerbated by a further lack of funds.

Retail banks, or high street banks, offer a variety of types of deposit

accounts to individuals, where the account holder can withdraw or deposit
funds. Deposit accounts come in several different types such as a
transactional account, or current account, which provides access to the
account quickly and with ease. This type of account is meant only for
short term access to funds, rather than saving or earning interest, and as
such tend to have low rates of interest and very few obstacles to
withdrawing funds, and no time period set for the account[7]. An example
of this is the Santander 123 Current Account. This account charges 2 a
month for the service, but offers a 3% AER (annual rate of interest) on
balances between 3000 and 20000, as well monthly cashback rewards
on selected household bills. Most current accounts have a minimum,
which must be paid into the account, a minimum to receive interest and a
monthly fee. For this account there must 500 a month paid in, 1000
minimum balance to receive interest, and the 2 monthly fee[8].
Another type of account is a savings account. This type of account is
interest bearing, as it is meant as a long-term store of money, and as such
does not offer easy or immediate access to funds for day to day
transactions as a current account would. An example of this type of
account is an ISA, or individual savings account, such as the 2 year
flexible cash ISA offered by Barclays bank. This account offers a fixed rate
of interest of 2.02% on all balances of 1 or over. ISA accounts are tax
free up to a certain limit, and only a certain amount can be paid in each
tax year. In the case of this account the cash ISA limit for deposits is
15000 this tax year (up to April 5th 2015) and funds may be deposited at
the discretion of the account holder up to the limit. ISA accounts tend not
to be flexible on withdrawals, as is the case with savings accounts, but the
account can be transferred out only in full before the maturity date in the
case of this account[9].

Retail banks Offer a range of methods of payments to customers,

mainly through transactional accounts, through several mediums.
Payments can be made in paper or physical form, and banks offer cheque
services to meet these needs. A cheque is a bill of exchange requiring the
value of transaction or amount in words, and in numbers, the date of
writing, the payee and the signature of the drawer. Cheques are useful for
handing over large sums of money for which cash would unlikely be
viable, for items such as a car, where the amount transacted could be
thousands of pounds or more. Its also a secure method of payment
through a middle man or post, where the cheque could not be cashed by
anyone other than the payee protecting against theft. However cheques
have several limitations as a method of payment, for example, cheques
are only valid for 6 months from the date of being written, meaning they
cannot be used as anything other than a short term store of money. A
defining feature of the cheque is the clearing system, through which a
cheque must be passed before paying out. This system passes the check
to the bank of the payee, where the account details are sent to the
drawers bank, and if there are sufficient funds in the account, they are
transferred. This system takes time as the cheque must be validated, and
the banks only clear at the end of each working day, meaning there will
be at least 2 days from the cheque being written to the payee having
access to the funds[10]. This can be an issue as a cheque can be written, a
good or service received, but then bounced because the drawer has
insufficient funds. The cheque has largely been replaced and outdated by
debit card payments.
Payments can also be made electronically. One way of making
payments offered by retail banks is a standing order. A standing order is a
payment fixed by the payer to be transferred to the payees account on a
regular basis. They can be very useful for monthly payments at a fixed fee
such as paying insurance or rent, as these amounts are not variable and
saves the payee from having to make transfers every month, or from
forgetting to make a payment. However payments through the BACS
system can take several days to be processed so funds may not be made
available immediately, but this system in the UK is being replaced by the
Faster Payments system where transfers are immediate[11].
Card payments are becoming increasingly popular, and especially through
credit cards. Credit cards give the user access to funds they do not have,
enabling them to make purchases and payments on credit. This means
that they receive the money at the time and repay it later. This can be
beneficial for large or unexpected payment, however banks charge high
interest rates for these services so it can be easy to accrue large debts jut
through interest.

Building societies cam about over 200 years ago as local organisations to
fund the construction of houses for members of the community. Members
would contribute until a house could be constructed, which was then
assigned to a member. Building societies then expanded until the Building
Societies Act 1962 allowed them to commence some banking activities,
from which they advanced to operate similarly to banks. The key
difference between a retail bank and a building society now is that a
building society is run for the members rather than for shareholders, as
anyone with savings with a building society is considered a stakeholder.
The central purpose of building societies in the last century has been the
provision of mortgages, to replace the contributory fund, which relied on
others. A mortgage is a loan secured against a property, usually the
property the mortgage is for, and enables the purchase with a repayment
set over a time period[12].
There are several different types of mortgage products available, like a
fixed rate mortgage, where the interest rate is fixed for a set term. One
such product is

ii) for 2 examples of mortgage products from a build soc.

a. outline 3 features of each product
b. analyse comparative pros and cons of the two products

[1] - http://en.wikipedia.org/wiki/Consolidated_Fund
[2] - http://www.oxforddictionaries.com/definition/english/Consolidated-Fund
[3] - http://www.investopedia.com/terms/g/governmentsecurity.asp
[4] - http://robertleach.co.uk/wp-content/uploads/2011/05/Quick-guide-to-legaltender3.pdf
[5] - http://www.bankofengland.co.uk/monetarypolicy/Pages/overview.aspx
[6] - http://www.investopedia.com/terms/q/quantitative-easing.asp
[7] http://en.wikipedia.org/wiki/Transactional_account
[8] http://www.santander.co.uk/uk/current-accounts/123-current-account
[9]
http://www.barclays.co.uk/Savings/ISAs/2YearFlexibleCashISAIssue4/p1242663711586
[10] http://www.chequeandcredit.co.uk/cheque_and_credit_clearing/the_clearing_cycle/
[11] http://en.wikipedia.org/wiki/standing_order_(banking)
[12] https://www.nationwide.co.uk/guides/buying-and-owning-a-property/first-timebuyers/understanding-mortgages-the-basics