Transcript 1-Introduction-FS - National Skills Academy for Financial Services

Financial Services Industry
Module 1
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
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
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?
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 pay is substantially higher than in the rest of the economy
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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
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 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
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
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
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
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)
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?
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
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
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