Financial services: a truly global industry

Financial Services: a truly global industry

Sector Overview

  • Gross Value Added: £123 billion[118]
  • Jobs: 1,113,000[119]
  • Exports: £61 billion
  • Exports to EU: 37% of total

The UK is the world's leading financial services centre and the most internationally focused marketplace in the world: it is a global leader in cross-border bank lending, foreign exchange operations, interest rates OTC derivatives, maritime insurance and the leading western centre for Islamic finance.

The UK’s global reach relies on a strong presence in Europe. For the sector as a whole, Europe is the largest single destination for exports.[120] The UK’s insurance industry is the largest in Europe, and the UK accounts for 85% of European-based hedge funds’ assets.[121]

The sector is a valuable asset for Britain. Financial services provide around 8% of the country’s total GVA.[122] It has the highest tax burden as a percentage of GVA of all sectors (37%), contributing around 7% of government tax receipts.[123]

The financial services industry plays a critical role in supporting British business operations by providing capital for investments. The UK’s financial services industry also supports a much wider nexus of business and professional services such as accountancy, auditing and legal services. While financial services contributed 8% of UK GVA in 2012, business and professional services contributed a further 6%. [124]

Global Trends

The sector is still recovering from the impact of the financial crisis which, in addition to hitting the sector economically, made it a focal point of public and political mistrust.

A series of regulatory reforms is sweeping through the sector. Following the crisis, new rules aimed at strengthening supervision of the sector and improving stability are suppressing returns as actors must hold more capital, more liquid assets and more collateral.

A global regulatory consensus with two major regimes– the EU and the US – has emerged after the crisis, influencing the rules for financial services across jurisdictions and reducing the room for manoeuvre for smaller regimes.  There are, however, recent signs of concerning divergence between these regimes.

International companies must navigate between reforms taking place at different levels of governance – globally, at regional level, and domestically.

Significant opportunities for growth lie in shifting global pools of savings and wealth. A large and growing middle class will fuel life and health insurance growth in Asia. Although mature markets remain predominant, emerging markets will contribute about 50% of growth through 2014. [125]

The rise of new channels to reach customers is changing the market. The increases of direct sales, such as online and by phone, have been spectacular, with direct motor insurance accounting for 40% of the total market in the UK.

Case Studies: the UK is a world leader in financial services

HSBC: One of the world's largest banking and financial services organisations.  With around 6,600 offices in both established and faster-growing markets, and an international network covering 80 countries and territories, HSBC serves around 55 million customers worldwide.   Its aim is to be acknowledged as “the world's leading international bank”.

Citi: A US headquartered company and a leading global bank with around 200 million customer accounts and operating in more than 100 countries. In Europe, the Middle East and Africa, Citi employs approximately 38,000 people. With its geographical footprint, breadth of business lines and global client base, Citi has to comply with the rules in these jurisdictions. Citi is drawn to London as a powerful international  financial centre and chose the city as its largest hub outside New York. Major financial hubs rely on strong regional support; as the US and Chinese economies underpin New York and Hong Kong, so London is the principal financial hub for the EU as a whole, with material consequences for employment and tax receipts in Britain. Citi sees major benefits in a common regulatory framework for banks across the EU and moves towards an international level playing field.

Aon: With 6,000 employees in 23 offices across the UK and more than 65,000 employees in over 120 countries, the company is the largest global player in many specialist areas including global reinsurance brokerage, management of captive insurance companies and employee benefits consultation. In 2012, AON announced that it would be moving its global HQ from the US to the UK, attracted by the UK’s global status as a hub for the sector. It is the UK’s largest insurance broker and provider of risk management services, and fourth in the UK's human capital consulting market.

Advantages of EU membership: the scale of the EU market gives strength to the FS sector

A key driver of growth for the UK’s financial sector has been the Single Market, which has brought FDI into the sector as European and global actors move their operations to London and regional hubs across the country. The UK’s financial services trade surplus with the EU has doubled in the past decade. This has substantially improved access to well-developed liquid capital markets for UK companies, assisting domestic investment and export ambitions.[126]

A substantial advantage for UK financial services firms is that EU rules have opened up European markets, particularly for securities and banking.[127] For example, rules offering firms the ability to use a single ‘passport’ across all member states to deliver services has allowed companies authorised in the UK to conduct business across the EEA (the 28 EU plus the three EEA EFTA states).

Integration has helped consumers and businesses through a reduction in cost of cross-border payments (average charge for a payment of €100 fell from €24 to €2.50 between 1999 and2004).[128]

The sector is also reliant on the access to EU labour markets. In over 45% of UK positive investment cases, decision-makers cited access to skilled staff – including EU nationals – as one of the core reasons for choosing the UK. [129]

Challenges of EU membership: the regulatory wave

New EU regulations will increase costs for financial services companies. However, reform post-crisis has been pushed at all levels, with a substantial part of EU rules implemented due to G20 commitments to ensure financial stability. A number of reforms have been pushed by the UK itself, such as the Retail Distribution Review and Banking Reform Bill on structural reform.  Regulation at EU level nevertheless remains a key risk for financial services companies. That said, there are a number of examples of positive EU regulation, such as the Recovery and Resolution Directive. 

No.1

London is the world's leading financial centre

Forward Agenda: UK financial services need continued access to the Single Market and rules that underpin the role of finance for the economy

Maintaining access to the EU Single Market is essential for financial services firms to continue to prosper and for the UK to remain an attractive location for foreign companies to base their European operations.

Completing the Single Market, in particular improving the digital policies to allow further penetration of online services to continental Europe, could add 1.1% to Europe’s GDP for the financial services sector. The sector needs to maintain access to EU labour markets to allow UK-based companies to gain access to the best talent. This should be supported by an emphasis on UK’s skills level through studies on financial literacy and STEM subjects supported and encouraged by the sector.

Securing access to third country markets through the EU’s negotiating weight will drive improvements in local regulation in emerging markets on foreign ownership – particularly for insurance companies. The sector would also like to see improvements of current double tax arrangements.

The regulatory agenda at global, EU and national level must link the need for good regulation and supervision with enabling the financial services sector to play its role supporting businesses and consumers.


References

[118] ONS, 2010

[119] ELMR

[120] ONS Pink Book 2012; ONS

[121] TheCityUK, ‘Key Facts about UK Financial and Professional Services’, 2013

[122] Haver Analytics UK database/ONS

[123] House of Commons Library, Financial Services: contribution to the UK economy, 21 August 2012

[124] Haver Analytics UK database/ONS

[125] PwC, Emerging opportunities: Financial services M&A in Asia 2011, Events & Trends, November 2011

[126] TheCityUK, ‘UK and the EU: A Mutually Beneficial Relationship’, 2013

[127] CRA International, ‘Evaluation of the economic impacts of the Financial Services Action Plan’, 2009

[128] CRA International, Evaluation of the economic impacts of the FSAP, March 2009

[129] TheCityUK, ‘Driving competitiveness: securing the UK’s position as the location of choice for financial and related professional services’, 2012