UPSC » UPSC CSE Study Materials » General Awareness » Financial Services Getting the Goods

Financial Services Getting the Goods

The provision of essential financial services is essential to the operation of any economy.

Without them, people who have money to save may have difficulty finding people who need to borrow money, and vice versa. And in the absence of financial services, people would be so focused on economising to protect themselves from potential loss that they might not purchase very many products or services. 

The price for the services 

There is a large amount of variation in the manner in which individuals pay for financial services, and the costs are not always made clear. It is possible for relatively straightforward transactions to be compensated on a flat-rate basis (for example, $100 in exchange for submitting an application). Charges may also be predetermined (for example, $20 per hour to process mortgage payments), contingent upon a commission (for example, 1% of the value of the mortgage sold), or proportional to profits (the difference between loan and deposit rates, for example). The incentives that come with the various forms of payment are distinct from one another, and whether or not they are appropriate depends on the circumstances.

Regulation 

The provision of essential financial services is essential to the operation of any economy. Without them, people who have money to save may have difficulty finding people who need to borrow money, and vice versa. And in the absence of financial services, people would be so focused on economising to protect themselves from potential loss that they might not purchase very many products or services.In addition, even relatively straightforward financial products can present complications, and the time that elapses between the purchase of a service and the date on which the provider is obligated to deliver that service can frequently be quite lengthy. Trust is an extremely important component of the market for services. Customers, whether they are savers or borrowers, need to have faith in the guidance and information they are given. Customers of life insurance, for instance, count on the insurance company still being in business after they have passed away. They anticipate that there will be sufficient funds to pay the beneficiaries designated in the will and that the insurance company will not cheat the heirs in any way.

Financial services 

There are a number of reasons why governments monitor the provision of various financial services. Chief among these are the significance of financial services to the economy and the requirement to cultivate trust both among providers of financial services and consumers. The licensing, the regulations, and the supervision that are required for this oversight are different in each country. In the United States, market supervision and regulation are the responsibility of a variety of agencies, some of which are state-level and others of which are federal in nature. The Financial Services Authority is in charge of supervising the entirety of the financial industry in the United Kingdom. This includes both banks and insurance companies. Supervisors in the financial sector are responsible for licensing and enforcing the rules governing the industry. Inspections, the investigation of complaints, and regular reporting and examination of accounts and providers are all examples of what can be included in supervision. The enforcement of consumer protection laws, such as caps on interest rates charged by credit cards and overdraft fees assessed to checking accounts, can also fall under this category. However, the recent explosive growth in the financial sector, particularly as a result of the introduction of new financial instruments, can put a strain on the ability of regulators and supervisors to keep risk under control. Regulations and efforts to enforce them do not always prevent failures because regulations do not always cover newly emerging activities, and violations of the law occasionally evade enforcement. As a result of these missteps, regulators frequently have the authority to seize control of a financial institution whenever it becomes necessary to do so.

Mortgage – backed security 

One example of how novel financial instruments can have unanticipated effects is illustrated by the part that mortgage-backed securities played in the recent financial crisis. In this scenario, financial companies were looking for consistent income streams, so they bought mortgages from the banks that originated them. They then allocated payments from those mortgages to a variety of bonds, which paid according to the performance of the mortgages’ underlying assets. It was beneficial for banks to sell mortgages in exchange for additional cash so that they could make more loans; however, because the loan makers did not keep the loans, there was less of an incentive for them to check the creditworthiness of borrowers. The financial companies that bought the mortgages were exposed to a higher level of risk than they had anticipated, and the bonds did not pay as much as was anticipated they would. Because of their lower income, borrowers had a higher probability of defaulting on their loans, which decreased the amount of money bondholders received, which in turn harmed the growth of the gross domestic product. Mortgage-backed securities were created with the intention of lowering investors’ exposure to risk (which they might have been able to do under certain conditions), but they actually ended up elevating that risk.

Conclusion 

Because the mechanisms that intermediate these flows can sometimes be complex, the majority of nations rely on regulation to protect borrowers and lenders and to contribute to the maintenance of the trust that is essential to the operation of all financial services. The productive use of money is facilitated by the provision of financial services. Consumers can give their savings to intermediaries, who may invest it in the next great technology or enable someone else to buy a house with it. This is a better alternative to the practice of putting money under their mattresses.

faq

Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

What exactly are the "goods and services" of the financial sector?

Answer. The term “financial services” refers to a broad industry that encompasses a variety of sub-indus...Read full

What kinds of things can be purchased with financial services?

Answer. Products Relating to the Financial Sector ...Read full

What exactly are monetary assets?

Answer. There are many different types of financial assets, including cash, stocks, bonds, mutual funds, and deposit...Read full

What are the four different categories of financial services available?

Answer. Commercial banks, brokerage firms, insurance companies, and investment banks are the four most common types ...Read full

What do financial services do?

Answer. A financial services company is a business or company which manages, invests, exchanges, or holds money on b...Read full