Transcript Slide 1
FINANCIAL SERVICES Financial Services Industry Module 1 FINANCIAL SERVICES The importance of Financial Services to the UK economy Shares of UK GDP. Source: ONS National Accounts Blue Book UK employment in financial services was 1.001m in June 2009, versus a high of 1.064m in 2007. Financial services employment in 2009 accounted for 3.5% of UK employment totalling 28.9m FINANCIAL SERVICES UK Financial services’ share of GDP in major economies. Source: The CityUK 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). The importance of Financial Services to the UK economy UK sector trade balances. Source: ONS Balance of Payments Pink Book FINANCIAL SERVICES Tax contribution of UK Financial Services. Sources: HMRC, PriceWaterhouse Coopers 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 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. TheCityUK annual survey 2009 What sort of job are you likely to end up doing? FINANCIAL SERVICES Jobs in London and the South East 12% Services jobs in London and South-East (% of total jobs) Non-services jobs in London and South-East (% of total jobs) 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 88% Breakdown of service jobs in London and South East UK economy Business services and financial intermediation Manufacturing Rest of economy 6% City-type jobs Other services jobs in London and South-East 32% 56% 94% 12% Source: ONS Why seek a career in Financial Services? FINANCIAL SERVICES Financial Services pay is substantially higher than in the rest of the economy 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 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) The average graduate debt is £20,000 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 FINANCIAL SERVICES Professional and retail business FINANCIAL SERVICES 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 FINANCIAL SERVICES 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 FINANCIAL SERVICES The second distinct area of the Financial Services industry is: The retail sector • Business to customer Retail sector FINANCIAL SERVICES 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 misssold 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 FINANCIAL SERVICES Prices in your local corner shop are higher than they are in the cash-and-carry. Prices of financial products in the High Street are more expensive than they are in the professional, or wholesale, markets Typical retail money changer’s board Foreign exchange (forex) dealer’s screen Retail prices versus wholesale prices Money changer’s prices (retail) GBP / EUR Bank buys: 1.32 Bank sells: 1.15 FINANCIAL SERVICES Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303 Bank sells 1.2301 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? Solutions: Question 1 Money changer’s prices (retail) GBP / EUR Bank buys: 1.32 Bank sells: 1.15 FINANCIAL SERVICES Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303 Bank sells 1.2301 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 1.2301 = €36,903 Solutions: Question 2 Money changer’s prices (retail) GBP / EUR Bank buys: 1.32 Bank sells: 1.15 FINANCIAL SERVICES Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303 Bank sells 1.2301 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 = £56,818.18 Professional (wholesale) customer: €75,000 ÷ 1.2303 = £60,960.74 Solutions: Question 3 Money changer’s prices (retail) FINANCIAL SERVICES Forex dealer’s prices (wholesale) GBP / EUR Bank buys: 1.32 GBP / EUR Bank sells: 1.15 Bank buys 1.2303 Bank sells 1.2301 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 1.2303 = 0.0897 Buy quotes (0.0897 ÷ 1.2303) x 100 = 7.29% 1.2301 minus 1.15 = 0.0801 Sell quotes (0.0801 ÷ 1.2201) x 100 = 6.57% How much profit do money changers make? FINANCIAL SERVICES Money changer’s prices (retail) GBP / EUR Bank buys: 1.32 Bank sells: 1.15 First transaction was changing £100 into euros for your European holiday £100 x 1.15 = 115 euros 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. 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 Exercise FINANCIAL SERVICES Write down as many different types of professional (wholesale) financial activities that you can think of Foreign exchange Fund management the trading of currencies managing investment portfolios International banking Investment banking cross-border banking transactions such as mergers and acquisitions Stocks and shares, and bond trading Custodian banking buying & selling for customers and their own account safe-keeping of assets Derivatives Insurance the trading of options, swaps and futures various types, including re-insurance Exercise FINANCIAL SERVICES Write down as many different types of retail financial activities that you can think of: Retail banking deposit accounts, lending and credit cards Insurance Financial planning and advice managing investment portfolios Life, medical, income and mortgage protection Pensions helping people save for their retirement Investment services from stock-broking to private banking