KEY TRENDS RESHAPING THE UK’S FINANCIAL SERVICES INDUSTRY
Key Trends Reshaping the UK’s Financial Services Industry 9
KEYTRENDS RESHAPING THE UK’S FINANCIAL SERVICES INDUSTRY
KeyTrends Reshaping the UK’s Financial Services Industry
Inrecent years, the UK has gone through a paradigm shift in financialservices markets. Technology has been placed at the top as theleading factor that has led to changes in financial services. The UK,classified as a first world country has experienced regulatorypressures, technological changes and risk management. The businessenvironment in the UK and the way business and financial institutionsinteract among themselves and with their customer has changed. TheUK’s financial services industry has tremendously transformed sincethe industrial revolution and an analysis of the industrychronologically shows the advancements it has made to date.
An Overview of the Changing UK Financial Services Sector
HistoricalStructure of the UK Financial System
TheBank of England was the earliest chartered bank and had a lot ofinfluence in the growth and development of UK`s financial sector. Itopened up centralization of financial resources and buildingsocieties with the aim of expanding financial wealth from theindustrial revolution. The adoption of the clearinghouse gave the UKa faster financial maturity than any other industrialized country(The Law Society of England and Wales, 2015, p. 34).This marked the beginning of the Eurodollar market.
KeyRoles of Financial Intermediaries
Retailbanks, which are intermediaries, offer both sight demand deposits aswell as time deposits. Wholesale banks, which act as depositoryinstitutions carry out business related to international finance.National savings banks, which are government sponsored, offer savingschoices to banks and private customers(Financial Stability Report, 2012, p. 1).The Giro Bank allows the sharing of payments as an alternative to thecheque system.
Carmanufacturers, financial mergers and manufacturing companies havegreatly influenced the UK financial market. Car dealers, who operateboth the manufacturing and service industries, act as money marketinstruments with a consolidated financial base(The Law Society of England and Wales, 2015, p. 61).The service industry, led by financial institutions has fosteredinternal borrowing and lending, which has seen the boost ofindustrialization of UK’s financial sector. Savings associations onthe other hand have specialized in granting home mortgages, sellingsavings deposits as well as other credit forms(Rose & Hudgins, 2006, p. 181).Families and institutions have been the greatest beneficiaries ofsavings associations.
Key Factors Influencing the UK Financial Industry
Withthe Brexit issue, there has been a decline in performance of the UK’sfinancial sector following new EU regulations. Most financialinstitutions and companies feel the changes are an eminent threatever since the UK developed into a single market. The EU financialservices had presented various business opportunities for financialbusinesses situated in the UK. The stealth taxes in UK banks andinsurance companies have raised concerns(Rose & Hudgins, 2006, p. 132).Financial institutions like Standard Chattered and HSBC arethreatening to move their headquarters from the UK due togovernment’s action of raising insurance premium taxes and banklevy(Smith, 2015, p. 1).Although the UK has fallen out from a financial crisis, a significantincrease in the regulatory burden of the financial sector can stillbe felt. This is a consequence of consumer-driven regulatory changesadopted by the government. Additionally, although the Fair andEffective Markets review will be implemented, new pressures forintervention into other new markets cannot be ignored.
Themacroeconomic policies in UK financial services markets havefar-reaching consequences on the banking sector. Additionally, theuntamed inflation rates have made banks and other financial servicesproviders suffer. Inflation has affected the value of UK’scurrency, which has a ripple effect on the banking sector. FollowingBrexit, the UK’s income and its economic levels have affectedfinancial markets. Banks thrive during an economic boom and incomeflows have reduced the amount of capital that banks can access(Allen & Overy, 2016, p. 5).However, FDI has remained stable, which is valued at over £1trillion, which is about half of what other members of the EU have.
Culturalattitudes and norms about interest charged on loans have contributedto various changes in UK’s financial sector. Financial agencies inthe UK that sell mortgage loans work on the culture of children inthe UK being independent as early as 16 years. Additionally, marriageis binding with few cases of divorce, a factor that has greatlydetermined the fast growth of home mortgages as well as propertyownership and development(Swati Dhingra, 2016, p. 6).Market experience, gained through the numerous financialintermediaries has increased access to capital in the UK, both atlocal and international levels. The UK and Canada share many marketexperience similarities, which is a socio-cultural factor.
MostFinancial Sector (FS) UK businesses are adopting the newesttechnology to compete locally and globally. The massive technologicalchanges taking place in the UK have opened up new opportunities aswell as challenges. The client demand for availability of onlineservices has brought a shift that has made financial markets andbusiness to shift. The financial services market is now focusing on amore direct and immediate platform of interaction with financialservices and products(Buckle, 2012, p. 18).Changes in financial technology have increasingly allowed customersin the UK to manage their investments as well as savings.Consequently, firms operating in the financial market have adoptedsystems that manage any fraud and demonstrated their value additionto the UK macroeconomic, financial sector. Firms operating in the UKfinancial sector have raised the possibility of opening new onlinebusiness models, where firms will not have to comply with regulatorysafeguards.
LegalRules and Regulations
ThePost-Brexit Model will determine any further legal changes neededafter the UK fell out of the EU. UK can still continue takingadvantage of the passport system and maintain financial regulatoryframeworks if it seeks to obtain the EEA and EFTA membership justlike Norway. Additionally, the UK is set to enjoy the freedom ofregulating its financial services sector with the UK-EU free tradeagreement models(Global Insight, 2013, p. 1).UK’s regulatory structure under the MIFID has transformed itsfinancial system as it enables cross-border access to depositories,exchanges and clearing houses.
Environmentalissues have presented themselves as both temporary and permanentchanges in the UK. Although the financial service industry is notblamed for any climatic changes per se, it drives economic processthat end up affecting the environment(International Finance Corporation, 2017, p. 1).Air quality, land contamination, air emissions and natural resourceshave affected the viability of financial institutions and clients.Investment operations now have to comply with new environmentalregulations to engage in production and manufacturing in the UK.
Overview of the UK Financial Services Sector in the 21st Century
Digitalizationand Technological Changes
Technologicalchanges have created opportunities for developing challenges oftechnological devices. New challengers in the UK market now have theopportunity to disrupt traditional business models. Withdigitalization in the 21stcentury, it has become easier for UK financial institutions topenetrate new markets locally and internationally. Fin Tech UKcompanies have taken the advantage of the ubiquity of technologyacross the world to develop mobile applications that help customersand financial institutions access money using the internet(Price Waterhouse Coopers, 2017, p. 2).Technology has also changed the interaction model between customersand UK financial institutions, which has brought new sources ofinvestment and capital.
Changesin Capital Sources, Returns and Investment
MostUK banks are now complying with stress tests, which is in response toregulatory investigations as well as putting up measures to managethe increasingly punitive fines of regulation. Some non-bankingfinancial institutions have emerged to be more profitable compared tobanks, which has increased their scope in the UK. These institutionshave been termed as determiners of UK’s financial stability.Banking and financial institutions are now investing heavily intechnology and use of mobile and internet banking to satisfy theircustomers(Jones, 2010, p. 124).As a 21stcentury concept, banks are conducting research on mitigation measuresto keep customers’ money and information safe.
RegulatoryChanges and Complexity
Regulatorypressures have increased UK’s cost of capital, which has promptedbanks to engage in capital-intensive businesses. Additionally, thepressures have shaped UK banks’ attitudes towards risk. Banks arenow redrawing boundaries between wholesale and retail banking. MostUK banks are now withdrawing from lending money to SMEs andinfrastructure, and instead, are investing in compliance with the newregulatory requirements. (Allen& Overy, 2016, p. 4).Fin Tech firms in the UK have managed to escape regulatory pressuresbecause of their classification as non-banking financial institutions(Swati Dhingra, 2016, p. 12).Therefore, they do not face the same amount of regulatory pressuresfaced by banks. Through this advantage, Fin Tech Firms are nowoffering competitive financial services alongside the banks.
Conclusions and Policy Recommendations
WithBrexit, the car industry in the UK is likely to fall. UK`s productionof cars is likely to reduce by a significant 12%, meaning there willbe an increase in prices by 2.5%. Although the UK might manage acomprehensive deal of trade and maintain zero tariffs, production ofcars is still expected to drop(Buckle, 2012, p. 9).Restrictions on single passport privileges are likely to lead to bigcuts in financial and business activities. Additionally, the UnitedKingdom will be unable to pass through EU regulations put by theEuropean Court of Justice. Unemployment is likely to fall, notbecause of lack of a thriving financial environment but due to lackof expertise. However, inflation rates are likely to remain unstable.
Transformationof the Financial Industry
Toincrease profit margins, most UK firms are now opting to use latestIT systems through mobile phone applications, the internet and Pointsof Sales to conduct transactions.
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