The finance service sector of the UK.

In 2021, the financial services sector contributed £173.6 billion to the UK economy, 8.3% of total economic output. Around half of the sector’s output was generated in London, which is also considered one of the biggest financial centers in the world.In March 2022 GFCI (Global Financial Centres Index) ranked London second in the world ( New York ranks first), where it has been since March 2018. Its proportion of national economic output puts the UK financial services sector at fourth place in the OECD. Though it has flattened over the past few years it is still one of the strongest pillars of the economy. 

 The productivity of the sector is also notable in comparison to other sectors. Over the past two decades its productivity growth rate has been almost double that of the whole economy, at 5.5% compared to 3.1%. In 2022, there were 1.08 million jobs in the financial and insurance sector in the UK, 3.0% of the total work places. 

The UK finance landscape today. 

The post-pandemic era in the UK’s finance sector is full of challenges but opportunities as well. First of all,a major transformation that the sector faces prior to the pandemic is digitalization. Covid-19 contributed to the rise of digital banking adoption by the consumers. Even people who were very reluctant to adopt this method of transaction were somewhat ”forced” to use digital banking, making the transition easier and quicker.

This has also resulted in a greater need for a resilient and secure digital environment. Investments in cybersecurity have accelerated over the past years.  UK-registered cyber firms raised more than £1 billion external investment and contributed about £5.3 billion to the UK economy in 2021. The financial services and insurance firms are the top investing sectors in cybersecurity, as cybercriminals tend to target these types of firms the most. Bank account fraud being at the top of the most common forms of financial cybercrime in the UK . 

Fintech is also a very “hot” topic in the financial sector. Being the second largest fintech market globally, online banking, cryptocurrencies, digital payments are only some of the fields that the numerous UK fintech companies are gaining more and more popularity. A very successful UK fintech company that has managed to be valued at $33 billion is Revolut, with millions of users. While meme stocks threaten to upend conventional thinking in investing, new assets like cryptocurrencies and NFTs promise to change the way that people invest in commodities and even their retirement portfolios.

Impacts of Brexit.

The financial services sector of the UK has traditionally had a surplus in the balance of payments. In 2021, exports of financial services were worth £61.3 billion, while imports were worth £16.6 billion, resulting in a trade surplus of £44.7 billion. Financial services made up 20% of all UK service exports and 9% of all service imports in 2021. UK exports of financial services to the EU have fallen notably since 2018. More specifically, between 2018 and 2021, UK exports of financial services to the EU fell by 19% in cash terms, while exports of financial services to non-EU countries grew by 4%. In Q1 2022, the EU accounted for 34% of UK financial services exports and the USA accounted for 31%. 

It is true that Brexit had a significant impact on the financial sector. The back then close relationship between the Eurozone-European Union and the UK has changed significantly after Brexit. The relationship between the two parties is determined by the TCA agreement. Among the rules that have been agreed upon are the following:

  • Neither the UK nor EU should limit the number of the other’s firms that can operate in its market or limit the number of people they can employ;
  • The other’s firms should enjoy no less favourable treatment than other national or foreign suppliers;
  • Both the UK and EU agree to grant to the other’s financial service suppliers which are operating in their markets access to any payment systems operated by the State.

Reports have shown that after Brexit More than 440 financial services firms in the UK have relocated part of their business, staff, or legal entities to the EU, and over 420 of them are setting up new hubs for their EU business. Banks have moved or are moving more than £900bn in assets from the UK to the EU, and insurance firms and asset managers have transferred more than £100bn in assets and funds. From this movement of firms there were some parties that have benefited more than others. Among them are Dublin, Paris, Luxembourg, and Frankfurt with the last starting to become the new financial centre of Europe since the UK left the EU. Simultaneously, there are also many financial institutions and firms that were “obligated” to set up UK branches in order for them to operate easier in a still strong financial centre as London. Only history will tell whether London will manage to sustain its status as the dominant financial centre in Europe or a new one will overthrow the back then global dominant power.

Focusing on the ESG. 

Another significant challenge and reform that the financial sector faces is the transition to more sustainable practices. A new area has emerged, this of sustainable finance. According to regulations that have been agreed -Green Deal, UN’s SDGs, the UK’s government sustainable commitments- companies, including financial institutions are obliged to enclose information about their sustainability goals and strategies towards minimising the environmental impacts of their business. Banks, insurances, and asset management firms should take into account this kind of enclosed information when they lend to a business or they make an investment. 

The sector of Green Finance has witnessed an extraordinary growth especially in the UK. Regulatory pressure but market sentiment as well pushes these institutions to take sustainability into serious consideration. It is now time to understand that these goals are not a burden to the growth of the business but a great opportunity to create additional value. Finance providers are now pressured more than ever to finance companies and corporations that operate responsibly or have a clear strategy in favour of sustainability, making it extremely difficult for the non-compliant ones to acquire capital.

The UK government has also committed towards financing sustainable development.They have committed to give  £11.6 billion of ICF between financial years 2021/22 and 2025/26 (the third phase of ICF) and at least £3 billion of ICF in development solutions that protect and restore nature in various sectors. It is evident that both the public and private sector are working collaboratively to achieve these vital goals and the radical transformation of the whole economy. Companies with clear sustainable goals, with both social and environmental targets are truly going to be rewarded for their responsible actions, especially in an

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