Financial Services Industry Module 1

The majority of financial services employment is in banking with 450,000 employees (in 2007); insurance 325,000 (2009); and fund management 50,000 (2008). UK employment in financial services was 1.001m in June 2009, versus a high of 1.064m in Financial services employment in 2009 accounted for 3.5% of UK employment totalling 28.9m The importance of Financial Services to the UK economy UK Financial services’ share of GDP in major economies. Source: The CityUK Shares of UK GDP. Source: ONS National Accounts Blue Book

The importance of Financial Services to the UK economy UK financial services contributed a total of £61.4bn to UK government taxes during 2008/09. This was down 9% from the total of £67.8bn two years previously. Tax contribution of UK Financial Services. Sources: HMRC, PriceWaterhouse Coopers TheCityUK annual survey 2009 UK sector trade balances. Source: ONS Balance of Payments Pink Book Financial sector net exports have grown strongly over the past decade. Strong underlying business across a range of activities, particularly banks, contributed to a 28% rise in net exports to a record £50.5bn in 2008, £11.1bn up on the £39.4bn in 2007

What sort of job are you likely to end up doing? Source: ONS If you live in London and the South-East (and want to continue living here), you are 7x times more likely to get a job in the Services sector than in any other area of employment City-type jobs account for 6% of all the Services sector jobs in London and the South-East

Why seek a career in Financial Services? On average, a degree is now worth an estimated £130,000 in higher earnings over the working life of a graduate (down from £200,000 in 2003, and falling)  Starting salaries in investment banks are £32,000 to £40,000  Average graduate starting salary in 2008 was £24,000  The starting salary of a qualified teacher is £25,000  Average salary in 2008 for all UK employees was £26,000  The average graduate debt is £20,000 Financial Services pay is substantially higher than in the rest of the economy The type of qualifications you have will have a substantial effect on your earning power  The more “vocational” the better

Careers in Financial Services Stock-broking Sales Research Trading Settlements Custodian services Corporate Finance Banking Fund management Investment management Hedge Funds Private Equity Insurance

Professional and retail business The Financial Services industry is divided into two distinct areas. The first is:  The professional sector (also known as the wholesale, or institutional sector) Business to business

Professional sector In the professional sector, certain assumptions are made:  Participants know what they are doing They do not need to have trades explained in detail They do not need to be protected from their own stupidity  Participants will honour their trades Trades agreed verbally or electronically are binding commitments “Dictum meum pactum” (my word is my bond)  Participants will deal in certain minimum sizes Prices quoted are usually for large volumes Prices are wholesale, i.e. cheaper  Participants know their end-customers And will vouch for their legality

Professional and retail business The second distinct area of the Financial Services industry is:  The retail sector Business to customer

Retail sector In the retail sector, certain assumptions are made:  Retail customers do not always know what they are doing They need to be given as much information as possible They may only be sold investments which are suitable for their needs  Retail customers can pull out of financial transactions Retail investors are given “cooling off” periods during which they can cancel transactions They can get their money back if financial products have been miss- sold to them – this includes insufficient information  Retail customers will deal in small transactions sizes Prices quoted are retail, i.e. more expensive  Retail customers have to prove their identity  And must be monitored for suspicious transactions FSA consumer finance web-site

Retail prices versus wholesale prices Foreign exchange (forex) dealer’s screenTypical retail money changer’s board Prices of financial products in the High Street are more expensive than they are in the professional, or wholesale, markets Prices in your local corner shop are higher than they are in the cash-and-carry.

Retail prices versus wholesale prices Forex dealer’s prices (wholesale) GBP / EUR Bank buys Bank sells Question 1: You have GBP30,000 (£30,000) and you want to convert them into euros. How many euros will you get if you are: a) a retail customer b) a professional (wholesale) customer ? Question 2: You have EUR75,000 (€75,000) and you want to convert them into pounds sterling. How many pounds will you get if you are a) a retail customer b) a professional (wholesale) customer ? Question 3: In percentage terms, how less favourable are the Buy / Sell quotes of the money changer (retail) versus the professional (wholesale) forex dealer? Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

Solutions: Question 1 Question 1: You have GBP30,000 (£30,000) and you want to convert them into euros. How many euros will you get if you are: a) a retail customer b) a professional (wholesale) customer ? Solution to Question 1: You are buying euros and paying in pounds. The money changer is selling euros to you, You must use the Sell rate quoted: Retail customer: £30,000 x 1.15 = €34,500 Professional (wholesale) customer: £30,000 x = €36,903 Forex dealer’s prices (wholesale) GBP / EUR Bank buys Bank sells Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

Solutions: Question 2 Question 2: You have EUR75,000 (€75,000) and you want to convert them into pounds sterling. How many pounds will you get if you are a) a retail customer b) a professional customer ? Solution to Question 2: You selling euros in order to obtain pounds. The money changers are buying euros from you. You must therefore use their Buy quotes: Retail customer: €75,000 ÷ 1.32 = £56, Professional (wholesale) customer: €75,000 ÷ = £60, Forex dealer’s prices (wholesale) GBP / EUR Bank buys Bank sells Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

Solutions: Question 3 Question 3: In percentage terms, how less favourable are the Buy / Sell quotes of the money changer (retail) versus the professional (wholesale) forex dealer? 1.32 minus = ( ÷ ) x 100 = 7.29% Buy quotes minus 1.15 = ( ÷ ) x 100 = 6.57% Sell quotes Forex dealer’s prices (wholesale) GBP / EUR Bank buys Bank sells Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

How much profit do money changers make? Scenario: Your travel company goes bust and your European holiday is cancelled. You decide to go to Brighton instead. You need to change your holiday money back into pounds. First transaction was changing £100 into euros for your European holiday £100 x 1.15 = 115 euros Second transaction is changing €115 back into pounds 115 euros ÷ 1.32 = £87.12 Money changer’s profit £100 minus £87.12 = £12.88 Money changer’s gross profit margin 12.88% Sainsbury profit margin Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

Exercise Write down as many different types of professional (wholesale) financial activities that you can think of Foreign exchange  the trading of currencies International banking  cross-border banking transactions Stocks and shares, and bond trading  buying & selling for customers and their own account Derivatives  the trading of options, swaps and futures Fund management  managing investment portfolios Insurance  various types, including re-insurance Investment banking  such as mergers and acquisitions Custodian banking  safe-keeping of assets

Exercise Write down as many different types of retail financial activities that you can think of: Retail banking  deposit accounts, lending and credit cards Pensions  helping people save for their retirement Investment services  from stock-broking to private banking Financial planning and advice  managing investment portfolios Insurance  Life, medical, income and mortgage protection