Financial service

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The financial services sector has a significant impact on our lives. The importance of the financial services sector is growing daily. Its functions now include saving money, investing money, protecting against potential risk, and, most importantly, providing the framework for the free flow of trade within the nation through a well-organized banking system and effective lending. The UK market is one of the most developed and globalized financial markets, and it is of utmost importance when it comes to the country. The financial services sector has permeated everything we consume, wear, and use (Akerlof 1970, p.489). However, over the years, the industry is witnessing changing trends that can possibly result into an unprecedented transgression. Even though the prima-facie intent of these developing changes is to keep the UK economy strong and to benefit the consumers of financial services since the industry is capable of creating the ripple effects, the regulators need to introduce new reforms to optimise these changes in favour of the entire industry and not just a handful of institutions. (Burrows and Low, 2015)

Therefore, in this paper, we highlight the key trends that reshape the functions and forms of financial services in the UK today, followed by a few recommendations for the reformers for the managing the forces which are reshaping the UK’s financial services marketplace in the 21st century.

Overview of UK Financial Industry

Next to the United States, UK market continues to remain the second most important financial centre in the world, however, post the carnage of recession, the financial service industry has been badly hit (Cadman, 2016). Still, the industry owns an important place for the UK economy. Highlighted below are some of the facts relating to the industry categorised according to the industry participants.

Leading Job Provider

Financial service industry continues to be one of the leading job providers in the country. By the end of 2014, nearly 2.2 million individuals were employed in the industry, representing 7% of the total UK employment force. This figure also included employment in related services such as management consultancy, accounting services, and legal services. Of the total service employment, 416,800 individuals were employed in banking and 308,700 individuals in insurance (Cummings, 2016).

Contributor to UK Economic Growth

Financial service industry contributed £190 billion towards the total GDP of UK in 2014. This represented 11.8% of the total economic output and is well above that an average 7.4% contribution by an industry (Cummings, 2016).

Tax Generator

The financial service industry in the United Kingdom contributed £66bn in tax revenue in 2015, accounting for 11% of the total tax receipts received in the country (Cummings, 2016).

Industry Participants and Their Services

The financial service industry is represented by commercial banks, insurance companies, securities services, fund management, private equity, and other allied businesses (Leland and Pyle 1977, p.380). Below discussed are the services offered by leading sectors in the industry, i.e. banking sector, insurance sector and fund management services.

Commercial Banks

Banks continue to dominate the financial service industry in the United Kingdom. Some of the services offered by banks are:

Deposit services;

Lending services;

Exchange service;

Safeguarding and fund management services (Cummings, 2016).

Insurance Companies

The insurance sector is the second largest sector in the financial service industry. Insurance companies provide a range of services to the customers, though the objective is the same: safeguarding the customers against the unforeseen risk factors. By the end of 2014, nine out of ten households in the UK were holding at least one insurance product, demonstrating the importance of the insurance services in the economy (Cummings, 2016).

Fund Management Services

The fund managers help to safeguard and increase the £4.3 trillion held in financial assets by the individuals and institutions. The services offered by the fund managers include pension services, life assurance policies, and other investments (Cummings, 2016).

Key Trends Shaping the Industry

Due to constant innovation in financial technology or the recent Eurozone exit, the financial service industry in the United Kingdom is being reshaped in an unprecedented manner. Below are some of the recent trends that are changing the financial service industry.

Digital Disruptions Changing the Business Models of Industry Participants

Innovation has penetrated the financial service industry and has changed the operational models for all the participating companies. Just as Uber disrupted Taxi Business, AirBnB disrupted holiday accommodation, now, the companies in the financial services industry are understanding that tech-savvy customers want technology-enabled services in financial service industry. The idea is not just to turn things fancy but also to provide cost-effective service. For instance, by the end of 2010, only 86 million individuals were using Mobile Banking, and by the end of 2015, the figure rose to 895 million. At the same time, while 502 million customers preferred branch banking by the end of 2010, the figure was reduced to 427 million by the end of 2015. The idea here is to use technology to save time and effort of the customer. Similarly, in the asset management industry, companies are now using technology to provide low-cost service to the customers. For instance, is a London based asset management founded in the year 2011 and by the end of 2015, it had a customer base of 1,00,000 customers. The success of the company is attributed to cheap portfolio management services ranging from 0.3% to 1% only. The company is able to provide low-cost, yet efficient services owing to technology-based portfolio management (Tikam, Vij, and Pal, 2016).

High-Frequency Trading

With its epicentre in the US financial market, high-frequency trading or the algorithm-based trading has now reached the UK financial market. Regarded as the most revolutionary change in the industry, the high-frequency trading is set to change the securities trading scenario. Unlike the present fundamental and technical-based trading, algorithm trading is based on computer programmes where computers are instructed to buy and sell the stocks within a matter of seconds. Involving million dollar investment, the high-frequency trading centre operates within the close proximity of the stock exchange and because of its close proximity, the operators are able to receive the information before others. Thereafter, the set algorithm receives the information and starts buying and selling the security within a matter of milliseconds (Aquilina and Yasusi, 2016). According to an independent investor that runs the algorithm-based securities trading firm, no security is bought for more than three (3) seconds and entire trading is done on the basis of mathematical and computer programme, completely disregarding any fundamental or technical analysis. According to a recent article published in the Financial Times, many more US based high-frequency traders are now eyeing the London market, especially for springboard of multiple exchanges (Cadman, 2016).

Increasing Mergers and Acquisitions Activity

After the era of financial crisis, the financial service industry in the United Kingdom has witnessed the unprecedented growth in the merger and acquisition activity, especially since 2011. Over the past five year period, the transaction for merger and acquisition activity in the financial service sector has increased by 120% and by the end of 2015, the transaction value was recorded at £43.50 billion. Even though M&A transactions are rising across the sector, however, the maximum transactions took place in insurance underwriting market. Another major trend within the industry and related to mergers and acquisition activity is the increasing foreign participation. In fact, by the end of 2015, nine out of ten merger and acquisitions deals were completed by the overseas investors. Stated otherwise, 75% of the M&A deals were undertaken by offshore investors with the maximum investment received from US based investors (IMAS, 2016).

UK Financial Industry in Few Decades

The changes above, especially the abrupt infiltration of technology in the sector, will surely transform the UK financial service industry. Changes such as telematics, robotic advice, high-frequency trading through computer programming, peer-to-peer lending, digital payments, will reduce the need for the human mind or human help as the case may be (IMAS, 2016). Therefore, only those businesses that can harness cost efficiency and attract customers using technology, will be positioned well in the industry and be able to counter or survive the competition (Bakker, 2016).

(Cummings, 2016)

On the other hand, notwithstanding global economic growth, UK’s financial service industry will continue to witness a continued investment, especially from overseas buyers (IMAS, 2016).

Recommended Policy Reforms

Strict Cyber Laws

One of the primary disadvantages of going all-digital is that users become highly vulnerable to cyber attacks which can lead to the privacy or financial losses. Therefore, it is imperative that strict cyber laws are proposed by the government (Hitchcock, 2015).

Check on High-Frequency Trading

Even though using the algorithm to trade is not illegal but the financial markets work on the principle of common access to information and since high-frequency traders receive information before the retail investors, this violates the principle of common access to information. Accordingly, regulators must frame new laws for securities trading to protect the interest of all the investors (Hitchcock, 2015).


Akerlof, G. A. (1970). The market for" lemons": quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3): 488-500.

Aquilina, M., and Ysusi, C. (2016). Are high-frequency traders anticipating the order flow? Cross-venue evidence from the UK market. [online] Available at: [Accessed Apr. 3, 2017].

Bakker, E. (2016). Technology is disrupting the financial services industry - here's how. [online] Available at: [Accessed Apr. 3, 2017].

Burrows, O. and Low, K. (2015). Mapping the UK financial system. [online] Available at: [Accessed Apr. 1, 2017].

Cadman, E. (2016). Services close to 80% of UK economy. [online] Available at: [Accessed Apr. 2, 2017].

Cummings, C. (2016). About UK financial and related professional services. [online] Available at: [Accessed Apr. 1, 2017].

Hitchcock, A. (2015). Regulating high-frequency trading: the UK. [online] Available at: [Accessed Apr. 3, 2017].

IMAS. (2016). UK financial services industry annual review 2015. [online] Available at: [Accessed Apr. 3, 2017].

Leland, H. E., and Pyle, D. H. (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of Finance, 32(2): 371-387.

Tikam, J., Vij, A., and Pal, N. (2016). Three trends shaping the asset management industry, neelesh pal, and how to capitalise on them. [online] Available at: [Accessed Apr. 3, 2017].

March 02, 2023

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Personal Finance Industry

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