The UK financial services industry employs over one million people in the UK and accounts for circa 5% of our national output. London has over 30% of the global currency trading making it a world leader in forex trading. What is all this based on? How did it get so large and what role does the UK financial services industry play in our economy?
Our economy is based on the flow of money - it is the medium of exchange in our society. Rather than using the bater system, using money permits us to divide it into smaller units, such as pounds and pence, as well as being acceptable by both sides in a transaction. In our complex monetary economy there is a large variety of transactions that involve money and one of the best examples is debt - which measures the claim of one person over another. The UK financial services covers all the activities with the monetary economy.
The UK financial services industry helps us to maintain the flow of funds in the economy. The flow of funds describes the movement of funds or money between different groups - this could be between people, or within the business sector or the government sector. Money never stops flowing within these sectors. But we know it is not this simple. There are two other main factors at play - being overseas trade (comprising of businesses, individuals and governments) and the financial intermediaries.
Financial Intermediaries
Financial intermediaries (such as banks and building societies) play a very important role in our society. They develop the facilities and the financial instruments which make lending and borrowing possible. Financial intermediaries are numerous, examples include:
- Banks
- Crowd funding platforms
- Insurance companies
- Unit trusts
- Stock exchanges
- Investments funds / VC funds
A financial intermediary can either be a broker, bringing together the user and lender of finance or as a principal, lending the money directly.
Like it or not, banks remain the largest financial intermediary in the UK today. Clearing banks are the biggest operators in the retail banking market, but the role of building societies has grown in recent years. We are also watching very closely the role of the crowdfunding market platforms.
Not all intermediaries are simply the brokers between lenders and borrowers, some act between institutions and institutions.
Why are financial intermediaries so important?
For many reasons, including:
- An intermediary, such as a bank, provides a convenient way in which a lender can save money.
- They provide a convenient way for borrowers to access money.
- They can aggregate the money from many people into large pools of cash in order to lend to one borrower.
- They provide for maturity transformation - i.e. lenders may want their money back on a short time frame but borrowers may need to know they have the money for a longer period of time (e.g. a mortgage for 25 years). An intermediary such as a bank bridges this gap.
The pooling of funds of large numbers of people by financial intermediaries allows these people to have access to investments they would not have had access to without the existence of intermediaries. For example, funds such as collective investment schemes in the form of unit trusts or other fund structures. Risk is reduced by pooling together, although it cannot be totally removed.
At Sapphire Capital Partners LLP we help to structure funds in the form of unit trusts or other fund vehicles. These are typically funds that pool investor money into a vehicle which invests in assets such as property development. We are therefore part of the intermediary process. If you would like to learn more about services please contact us via the link below.
In summary, one of the main roles of the UK financial services industry is intermediation. Without this, the whole lending and borrowing process would be a lot less convenient. 