FRE1 LO1: The UK financial services industry, markets and asset classes

Learning outcome 1 asks you to understand the UK financial services industry in its European and international context. It covers four assessment criteria: the purpose and structure of markets (AC1.1), the main asset classes (AC1.2), the role of government and international standards (AC1.3), and the Bank of England, financial institutions and financial crime (AC1.4). This is the "big picture" topic of the CeMAP® FSRE module, and its vocabulary turns up in every later unit.

Money and the purpose of financial markets

What money does

Function	Meaning	Example
Medium of exchange	Accepted in payment for goods and services	Paying for shopping by debit card
Unit of account	A common measure of value	Comparing two house prices in pounds
Store of value	Holds purchasing power over time	Keeping savings in a deposit account
Standard of deferred payment	Debts can be expressed and settled later	A 25-year mortgage in pounds

Inflation weakens money as a store of value. If prices rise faster than the interest earned, savers lose purchasing power.

Why financial markets exist

The financial services industry moves money from people who have a surplus (savers and investors) to those who have a deficit (borrowers): households, businesses and the government. Firms that stand in the middle are financial intermediaries. They add value in several ways:

1. Aggregation. Many small deposits are pooled to make large loans.
2. Maturity transformation. Banks take short-term deposits and lend long term, for example as 25-year mortgages.
3. Risk transformation. A depositor is exposed to the bank, not to every individual borrower.
4. Lower costs. Intermediaries spread the cost of research, credit checks and administration.