FSC521 The Financial Services Industry Assessment 2

Weighting – 35% 

Learning outcome

• Describe financial markets and systems, including the specific roles of key market participants.
• Analyse how key factors in the economic environment impact participants in the financial services sector.

Instructions

Complete and submit your assessment according to the Open Polytechnic’s Assessments webpage. This includes information on academic integrity, formatting, word limits and referencing.

• Include your name, student number and the assessment number.
• Number your pages.

 Submission

• Submit your assessment in one file.
• Submit your work through your iQualify course.
• Emailed assessments will not be accepted.
• You will receive an automated notice advising you of your successful submission.

By submitting your assessment, you confirm that it is your own, original work.

For all questions, provide sources of information/references where relevant. Ensure your answers are clearly labelled/numbered and professionally presented.

Question 1: The insurance sector and the reinsurance market

You are an insurance broker employed by Aotearoa Insurance. All brokers at Aotearoa Insurance are financial advisers.

a). You receive a call from a prospective client. They ask two specific questions:

‘I see you are an insurance broker; what does that mean?’

‘How do I know it’s OK to use you?’

Answer these questions, ensuring you explain:

i) your role as an insurance broker ii. regulation that relates to you under the Financial Markets Conduct Act 2013.

(Word count guideline: 150 words)
(10 marks)

b). Jackie emails you to renew the sum insured on their home. The premium you quote is a lot more than what they had anticipated. You explain this is due to a rise in dramatic and costly natural disasters, not only in Aotearoa New Zealand, but around the world. She asks you to explain why overseas natural disasters should affect their premiums.

Write an email response to Jackie in which you:

i) explain the difference between the roles of the insurer and reinsurer

ii) explain why overseas natural disasters have caused the premiums on their house insurance policy to increase

iii) describe two benefits of reinsurance for insurance companies and two benefits of reinsurance for consumers like Jackie. Note: begin your email ‘Dear Jackie’.

(Word count guideline: 300 words)
(15 marks)

Question 2: Financial services providers and monetary policy

You are a mortgage adviser.

Xin approaches you to help her find a home loan with a bank. You advise that banks are not the only type of financial institution operating in the lending sector.

a). Select one bank, one building society OR credit union, and one deposit-taking finance company currently operating in the Aotearoa New Zealand financial services industry that can provide a home loan for Xin.

Help Xin understand the difference between the range of providers for each financial institution by completing a table like the one below with the following information.

i) The name of the financial institution.

ii) Provide a link/URL to the webpage showing they offer home loans.

iii) Briefly explain their ownership structure.

iv) Explain how that type of financial institution is regulated and by whom.

v) Include their current variable loan rate.

Note: You will need to expand the table to fit the required information in it.

(Word count guideline: 100 words)
(10 marks)

Xin contacts you for further advice. She has read in the media that, while inflation currently sits at 3%, it is rising and is expected to reach 8–9% in the next six months. You note that one year ago with your help, Xin obtained a $600,000 home loan: 50% on a table loan with a three-year fixed rate and 50% is a revolving credit facility.

b). Prepare a response for Xin in which you:

i) predict the action the Reserve Bank of New Zealand will take in response to rising inflation. Explain why it will take this action

ii) explain how and why rising inflation will impact Xin’s home loan.

c). How might you stay informed about economic factors that influence interest rate movements, and thus be in a position to provide the best advice to clients like Xin? Give one example.

(Word count guideline: 250 words)
(10 marks)

Question 3: Investment markets and the impact of recession

You are an investment adviser.

Sanjay received a $100,000 inheritance and seeks advice on developing a portfolio of investments. He has already placed $25,000 on a six-month term deposit with his bank and wants advice on investing the rest.

You explain he has already invested in the money market with his term deposit, and he should now consider investing equal amounts in the property, equity and debt markets to spread his risk. At his request you agree to send him a written recommendation on the best way for him to invest in the property market and explanation of how the equity and debt markets work.

Part a.  

Write a recommendation and explanation for Sanjay. Include the following.

i) Recommend the best way for Sanjay to invest $25,000 in the property market. Give reasons for your choice.

ii) What are the money market and capital markets? Provide a brief explanation for Sanjay that outlines key differences between these financial markets.

iii) You advise Sanjay to invest $25,000 in the equity market and $25,000 in the debt market. Your task is to advise Sanjay on how he might do this.

For each capital market:

• There must be at least one trade at primary and one trade at secondary. Ensure Sanjay understands the difference between these two terms.
• One of these trades must be conducted Over The Counter (OTC) and the other via an applicable exchange within NZX. Ensure Sanjay understands the difference between OTC and exchange trades.

Notes for iii:

• How you split the 25k in each instance is at your discretion.
• You may use actual or fictional organisations for each trade.
• Trades must be realistic and achievable for Sanjay, taking into account any barriers to investment that may exist.
• Trades must be direct investments on each market. Investment by way of packaged securities like ETFs or managed funds will not meet task requirements.

RBNZ/Financial Market Infrastructures (FMIs)

iv) Under item iii. you organised several trades on both the equity market and debt market.

• Identify two FMI payment/settlement systems in use for these trades that RBNZ has some connection with. Briefly describe what these systems do.
• Why does RBNZ have an interest in making sure these systems are properly managed and work as they should? 

Trading on NZX 

v) Sanjay has asked if he can personally buy and sell securities directly on the NZX exchanges you’ve identified under item iii. What will you say to Sanjay?

(Word count guideline: 500 words)
(25 marks)

Part b. 

Sanjay’s portfolio has been up and running for two years now. Since then, the Aotearoa New Zealand economy has slowed, and the country is now in recession.

i) Describe the characteristics of a recession.

ii) Describe the impact of a recession on both the equity and debt markets and how it will affect the performance of Sanjay’s investments in those markets.

(Word count guideline: 250 words)
(10 marks)

Question 4: The tax system and fiscal policy

Taika joined ABC five years ago on a starting salary of $95,000. He has received regular annual increases in salary and in the last tax year earned $120,000. He also received an annual return of $3,500 on his KiwiSaver default fund and $1,200 interest on his Supersaver account at Aotearoa Bank.

Taika owns his own home. During the last tax year, he paid a total of $18,000 in interest on his mortgage with Aotearoa Bank and made a lump sum repayment of $5,000. He also paid the following annual insurance premiums: $750 vehicle cover; $3500 home and contents; and $240 term life policy. All policies are with Aotearoa Insurance.

Part a.

Complete the following tasks according to Aotearoa New Zealand’s tax system.

i) Calculate the total annual tax deducted through PAYE on his $120,000 salary. Ignore ACC earners levy and deductions for KiwiSaver. Show all your workings.

ii) Other than Taika’s salary, identify:

• what income is subject to tax
• the type of tax
• the rate at which tax should be deducted
• and by whom.

iii) Identify:

• which of Taika’s payments include a tax component
• the type of taxthe rate at which tax should be deducted, and by whom.

Note: You do not need to calculate the dollar amounts for parts ii. and iii. of this question.

(Word count guideline: 100 words)
(10 marks)

Part b.

Economists are worried that household debt is spiraling out of control and the economy is overheating. There are signs that the government will use fiscal tools to address the situation.

i) Identify the phase in the business cycle Aotearoa New Zealand would be experiencing if the economy were overheating. Describe the characteristics of this phase.

ii) Identify one change the Aotearoa New Zealand government could make to its fiscal policy which would cool the economy and thus impact Taika. Explain what the government aims to achieve by taking that action. Bearing in mind what you know about Taika’s earnings and outgoings, describe how he might be personally affected by this fiscal-policy initiative.

(Word count guideline: 400 words)
(10 marks)

 Marking schedule