CISI – Financial Products, Markets & Services Topic – The Financial Services Industry (1.1.2) Professional and Retail Business

Professional or Retail? There are two distinct areas within the financial services industry: Professional sector Retail sector

Professional or Retail? Financial service type Transaction Duty of care Size Price Typical services (Wholesale or Institutional) business to business – transactions where both sides are businesses Less duty of care – assumes buyers know what they are doing Larger transactions taking place Cheaper prices – ‘wholesale’ Focus on International banking, Investment Banking, Fund Management, Derivatives, IPOs, underwriting debt and equity offerings Professional sector Retail sector business to consumer – transactions where one side is an individual consumer Greater duty of care - Buyers are given a ‘cooling off’ period as it is assumed they do not always know what they are doing Smaller transactions taking place More expensive prices – lower volumes traded Focus on commercial banking -current accounts, savings, insurance, mortgages, loans, credit cards, investing in pensions, investment services, financial advice

Retail and Professional Business in Foreign Exchange What is the Foreign Exchange Market (forex or FX)? The Trading of one currency for another

Retail and Professional Business in Foreign Exchange – calculating exchange rates Example exchange rate calculation A retail customer who is planning a day trip to France has £100 and he wants to convert the money into Euros. He visits his local bank and sees that the bank is quoting the following: Bank buys Bank sells GBP/EUR 1.32 1.15 Q1. If the customer is converting GBP into Euros, will he be given the quoted Bank buys or Bank sells rate? The customer will be given the ‘Bank sells’ rate as he is buying currency from the Bank. If he was changing his Euros back into GBP on his return, he would be quoted the ‘Bank buys’ rate. Q2. How many Euros will the customer get for his £100 £100 x 1.15 = €115

Retail and Professional Business in Foreign Exchange – Retail vs Retail and Professional Business in Foreign Exchange – Retail vs. Professional Activity Conclusions How are retail customers and professional clients treated differently? Prices tend to be higher for retail customers in comparison with professional sector customers. Retail customers pay more to buy another currency than professional clients. Retail customers get less than professional clients when they sell one currency for another. The difference in the ‘bank buys’ and bank sells’ quoted rates for retail customers is a major source of profit for the banks. Why do you think this is the case? Where professional clients are involved, the percentage profit margin generated is far less in comparison but the quantity and sums involved are much more substantial. Professional clients have to enter transactions that meet or exceed a certain minimum quantity (‘lot’ size) Often transactions are much bigger than the minimum amount – most professional foreign exchange transactions are in lots of 8 to 10 million units.