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Commercial Dynamics in Financial Services Market Assessment 2010
Key Note Publications Ltd, Nov 2010
The main comparisons in this Market Assessment are with the 2002 edition; this gives a timeline of 8 years, which saw the financial sector boom, bust and, with the aid of bailout funds, step onto the growth escalator once again. Between 2002 and 2010, demutualised building societies have embarked on excessively risky growth strategies, and many of the remaining mutual societies have sought merger partners.
In 2010, the UK's domestic market was receding in international importance, but this created opportunities both for mutual societies, which had been struggling, and for new ventures. Consumers buying homes were benefiting from ultra-low interest rates on variable mortgages but new mortgages were hard to obtain and new personal loans were often 7.5% and more above base rate.
The UK economy was, in 2010, over-dependent on financial and other services, and on defence-related sales. Between 1990 and 2010, the UK lost nearly half of its manufacturing jobs, which were already in steep decline due to the policies adopted by Ronald Reagan in the US and Margaret Thatcher in the UK. Employment in the taxpayer-funded public sector boomed. Jobs in public administration, defence and social security rose by 60%, in education by 33%, and in health and social work by 55%.
Financial groups in 2010 were slightly less important in the UK's top 20 companies than in 2002, but energy and mining groups were more significant. HSBC was the largest bank in both years. The same for-profit investors appear over and over again in the lists of major shareholders in financial groups, including BlackRock Inc, Legal & General Group, and AXA. In August 2010, four institutional shareholders, and the UK Treasury, controlled over 21% of the combined equity of the ten largest financial groups in the UK: a substantial degree of concentrated ownership.
Organisational size is an issue. High-quality service to retail customers becomes less important to a large multi-stream financial organisation, especially as its income from investment transactions grows. Business size, and inflation of top salaries, increase the distance between directors and the customer-facing staff. Overall in financial services, the rewards of company growth include the protection of becoming `too big to fail', hence the state bailouts and quantitative easing programmes that enable financial groups to continue trading in the same risky ways as before the crisis.
Public capacity to fund a future bailout is very low, however. UK taxpayers in August 2009 were, for example, facing a National Debt already exceeding £940bn. Furthermore, the general public do not have the financial resources to influence large corporations. In the UK in 2007-2008, 89.3% of male taxpayers and 96.2% of female taxpayers had pre-tax incomes under £50,000 a year. Great inequalities of income pose important questions for government, as people with low incomes tend not to participate much in the formal economy, including the formal financial sector. However, the majority of governments appear to accept that the economy determines their policies, rather than policies setting the economic agenda.
The refusal of governments to let large financial groups fail saved economies from greater stress in the short term, but by reducing the immediate danger, probably prevented the radical banking reforms that are needed. The 2010 Dodd-Frank Act in the US is a watered-down version of the original more stringent regulatory intentions. Politicians in the US and elsewhere are heavily dependent on campaign contributions from business, including contributions originating in the financial sector, and are thus reluctant to impose legislation to which the financial sector objects.
Derivatives developed from practical risk-hedging origins into the application of complex mathematical formulae to constantly shifting realities and unpredictable events. Around $1.311 quadrillion was outstanding in derivatives contracts at December 2009-March 2010 — nearly 23 times more than the world's gross domestic product (GDP).
Deposit-taking banks in the US were not allowed to function also as investment banks between 1933 and 1999, when the prohibiting legislation was repealed. The US set, and still sets, the example for the rest of the world. The separation of functions was safer for retail customers with their money in bank accounts, and in their capacity as taxpayers.
In terms of main media advertising, there has been a shift since 1999-2000, when advertising for credit cards dominated financial advertising in the UK's consumer media, followed by corporate brands and personal loans. In 2009-2010, motor insurance was by far the largest category, followed by brand-building, and accountants and solicitors (including injury claims). These important categories do not fully reflect the most significant advertising development of the years 2000 and 2010: the expansion of comparison websites.
The UK's mass retail market for financial services was less attractive to foreign companies in 2010 than in 2000. In 2000, foreign insurers had a bigger role than foreign banks in UK mass-market financial services, and in 2010 this situation continued, although Santander was increasing the foreign banking presence. Between 2000 and 2010, foreign insurers in the UK moved to focus more on direct sales of general insurance products, through their own operations or via partners, and on life, pensions and investments for corporate and affluent individual clients.
The worldwide costs of the financial crisis may exceed one fifth of annual global GDP. In the UK, existing and known future public-sector liabilities, including financial bailout costs, are likely to be around £3.8trillion, some £61,300 per head of the 2010 UK population. Weak national control of financial businesses is a feature of multinational capital flows, and of the absence of an international framework for insolvency.
In the UK, the coalition Government, elected in 2010, probably added to customers' worries about inadequate financial regulation with its decision to axe the Financial Services Authority (FSA). The coalition's first Budget, in June 2010, contained measures to squeeze consumers' incomes. Few people have the continuing financial resources to invest adequately for a pension or to participate in financial services apart from basic money management and protection products: the outlook is more self-help than self-gratification.
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