City of London Economic Research

The role of large financial services firms in UK employment

 

By Dr Laura Davison, Head of Research at the Economic Development Office, City of London Corporation

 

My previous blog (28/09/2017) highlighted how important a role the UK’s large financial services (FS) firms play in generating turnover – with the 115 FS firms with more than £1 billion turnover generating 88% of the sector’s turnover.[1] This week, I’m looking at how important a role large firms play in employment, using new data from the Office for National Statistics (ONS), which lets us look at really large businesses – those employing many thousands of people.

To put financial services in context using the new Business Register and Employment Survey data (BRES)[2], there were 1.06 million financial services jobs in Great Britain in 2016 – 3.5% of employment. Nearly two thirds of these – 663K (63%) were based outside of London. Financial services grew by 26.5K jobs in the year to 9^th September 2016 – 2.6% growth, compared with 1.6% growth across all sectors; this represented 5.5% of the net jobs growth across Great Britain.

So, financial services plays a significant role in the UK’s economy. What part do the very largest firms play within this? Most forms of reporting define large firms as those employing 250 or more people. A new ONS dataset lets us look at much bigger firms – those who employ over 15K people, and those who employ between 3K and 14,999 people. [3]

Across the UK, 130 firms[4] employed more than 15,000 people in 2016; 10 of these were financial services firms (0.02% of all financial services firms). These 10 firms collectively employed 32% of the UK’s financial services roles, providing 328K jobs.

Although this represents a very high concentration of jobs in large firms, two other sectors are even more concentrated in their very largest (15K+ employees) firms – retail (48%), and public administration and defence (40%). For other sectors, this concentration is a lot lower – and in areas such as professional services, construction, property, and arts, there are no such firms listed.[5]

 Looking at the next level of businesses – those employing between 3K and 14,999 employees, there were a further 40 FS firms with between, collectively accounting for 21% of FS jobs. As the chart below shows, then, collectively 50 FS firms account for over half of the UK’s FS employees – some 539K jobs.

 It’s worth noting that the largest FS firms in the UK are bigger even than these categories would suggest – with banks such as HSBC and Barclays employing between 40K to 50K people in the UK.

 

[1] http://colresearch.typepad.com/colresearch/2017/09/the-importance-of-very-large-financial-services-firms-to-the-uk-economy-turnover-analysis.html  

[2] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/

businessregisterandemploymentsurveybresprovisionalresults/provisionalresults2016revisedresults2015

[3] https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/adhocs/007466analysisofenterprisesintheukbyspecifiedemplo

eesizebandanduksic2007broadindustrygroup2016

[4] NB ONS counts are rounded to the nearest five.

[5] Though as counts are rounded to the nearest five, there may be one or two in practice.

The balancing act: how the UK’s record trade surplus in finance and insurance supports the wider UK economy, and shows the international reach of UK financial services

 

By Fiona Morrill, Financial Services Research Officer in the Economic Development Office

 

This week we’ve been looking at the ONS’ new data on international trade in financial and insurance services in 2016[1], which help to shape our understanding of how finance supports the wider UK economy, and the international reach of UK financial services. I’ve looked at the growth in financial and insurance exports over time, and where these exports go to internationally, to get a sense of where the UK’s global links lie.

In this blog post we look at three key concepts in services trade: exports; the services the UK supplies to international markets; imports, the services the UK demands from international markets; and the surplus, or exports less imports, which reflects the net services trade balance. We look at both the combined contribution from financial and insurance services, as both are important within the Square Mile, London and the UK, as well as splitting these out when we start looking at geographical trade patterns, as the two are very distinct.

At the top level, the trade surplus generated by financial and insurance services reached a record high (since records began in 1986) in 2016, forming the biggest contributor to the overall increase in the UK’s services trade surplus.

• Exports – (shown by the green and blue stacked bars below) The UK exported a record high of £79 billion in financial and insurance services in 2016, rising almost £12 billion or 18% on 2015’s total of £67 billion.
• Imports – (shown by the yellow line below) By contrast, imports of financial and insurance services have remained relatively stable, rising to £11 billion in 2016 from £10 billion in 2015.
• These two trends combined mean that the financial and insurance trade balance (shown by the purple line below) has risen to £68 billion, up from £57 billion in 2015, a rise of £11 billion or 20%.

 

Source: ONS, Pink Book, 2017

Focus on: finance:

Taking financial services trade alone, exports reached £61 billion in 2016, a record high, and an increase of £9 billion or 18% on 2015. Financial services exports are made up of monetary financial institutions’ exports (banks and building societies fees), transactions involving financial instruments (so for example raising equity, issuing debt, and managing risk using financial markets), fund management and financial intermediation including borrowing and lending services. Fund management alone accounted for a £1 billion rise in FS exports, or a quarter of the total increase, demonstrating the increasing importance of the UK as a hub for fund and asset management.

Focus on insurance:

Looking at insurance services, exports reached almost £18 billion in 2016, an increase of almost £3 billion or 19% from 2015.   Insurance services exports are made up of freight insurance on imported or exported goods, direct insurance (life, accident, fire, marine and aviation), reinsurance and pensions. The rise in insurance exports was driven by a rise in the ‘other direct insurance’ category, which includes (amongst others) accident and health insurance; marine, aviation and other transport insurance; fire and property insurance, as well as ‘auxiliary insurance services’, including activities of brokers and agencies. The direct insurance services outlined below accounted for £2 billon of the rise, reflecting London and the UK’s status as an insurance hub.

The global reach of financial and insurance services:

Looking at where these services go, the EU remains the UK’s largest trading partner, accounting for 36%, or over 1 in 3, of financial and insurance services exports. The share is slightly down on 2015’s 41%, driven by a drop in insurance exports of £2 billion, somewhat offset by a rise in FS exports of £3 billion. Elsewhere there’s been little major change in terms of finance and insurance export destinations except for Japan, where the UK has increased its exports to £5 billion from £3 billion, and now accounts for 6% of UK exports.

The map below shows the value of UK’s financial and insurance exports to our global trading partners in £millions in 2016, and the % of the UK’s finance and insurance exports these countries account for.

FS trade blog
Infogram

NB. Map shows UK trade with individual countries within the EU. As a single bloc, the EU accounts for almost £29 billion of 36% of UK exports. Map also excludes countries classified as ‘other’ by the ONS, which accounts for £25 billion or 32% of UK exports.

Source: ONS, Pink Book, 2017

 

The wider benefits of trade

As well as demonstrating the UK’s competitiveness in financial and insurance services, the record highs in finance and insurance exports and trade balance provide wider benefits to the economy, including:

• The UK’s financial and insurance services trade surplus helps to balance the UK’s overall trade deficit, driving the UK’s trade surplus and offsetting more import-intensive activities.
• Access to global marketplace ensures that UK financial firms can benefit from benefits of scale and specialisation, providing jobs and boosting growth. The FS trade surplus reflects the globally competitive and specialised nature of UK financial services, with a leading share of foreign exchange turnover, cross-border bank lending and debt issuance.
• The benefits of efficiency from servicing larger markets means that UK firms and households also benefit from high quality and competitively priced financial services, supporting their growth and expansion.
• Firms that export also tend to be more productive and more innovative[2] meaning they contribute more towards UK economic growth, and are likely to make a higher tax contribution.

The importance of financial services trade to the UK economy and the role of the UK as a global asset and FS hub, underlines the importance of securing access to the UK’s largest trading partner in FS, the EU, as well as the importance of ensuring certainty in our future trade and investment relationships with key global partners, to enable the industry to continue to serve its domestic and global customers.

 

 

[1] ONS, The Pink Book, 2017, https://www.ons.gov.uk/releases/unitedkingdombalanceofpaymentsthepinkbook2017

[2] Harris and Li (2006), https://www.gla.ac.uk/media/media_36279_en.pdf

The Digital Square Mile

 

By Dr Edward Jones, Researcher in the City of London Research Team 

 

The growth of the digital industries is a much-discussed phenomenon, credited with having transformed the economic fortunes of our near neighbours in Shoreditch and Hoxton. At the metropolitan scale, the Mayor of London anticipates that ‘Information and Communication’ (ICT) is set to increase to 668,000 jobs by 2050[1]. Finance and Insurance firms remain the biggest employers in the Square Mile (discussed in our 6^th October blog post[2]), but ICT is growing – potentially in response to the digital appetite of the City’s larger sectors.

Recently released Business Register and Employment Survey (BRES) data allows us to analyse the digital industries component of ICT in greater detail. Tech City UK has identified several four-digit Standard Industrial Classification (SIC) codes which justifiably cover the ‘digital tech’ sector[3]. Zooming in on these, while stripping out activities like the manufacture and repair of computer equipment, gives a fine-grained view of the performance of the ‘digital tech’ sector of the Square Mile, shown on the chart below.

 

 

The data suggests City digital firms might indeed be supporting the wider finance and insurance cluster. The City’s ‘computer consultancy activities’ sector has more than doubled to 13,500 employees from 2010 to 2016, and has widened its lead over other digital tech sectors. Computer consultancy across London has grown far less dramatically – at 42% over the same period.

Overall, Square Mile digital tech employees have increased by just over a half between 2010 and 2016, from 19,700 to 30,700. It may even be the case that digital tech activity in the City is greater than these figures suggest, for three main reasons:

Firstly, digital employees may be wrapped up in the wider SIC category of their firm. Digital and tech activities could be carried out in-house by businesses which lie outside ICT, such as financial services (FS) and insurance firms. Fintech is a growing phenomenon – PwC view digital innovations and technology-enabled change increasingly as a mainstream element of FS firms,[4] while Deloitte stress technological innovation as a major driver of change for FS[5].

Secondly, FS firms could ‘buy in’ digital tech expertise from businesses located outside the Square Mile. Recent research for us by KPMG indicates that 61% of financial institutions are partnering with innovators to develop their fintech capabilities[6]. City firms might exploit the digital business offer of the wider ecosystem, using the services of businesses registered in the rest of London, or indeed further afield.

Thirdly, firms doing digital tech work don’t necessarily categorise themselves as such. Both Spotify and Google have declared themselves part of the ‘other business support service activities not elsewhere classified’ SIC category[7]. The variety and reach of SIC codes do not necessarily capture the diversity of activities carried out by firms, and businesses might not choose to adopt the code which closely matches their overall function. Nathan and Rosso[8] have used big data to investigate ICT firms, and found the sector 42% larger than SIC-based estimates.

The chart below compares the numbers employed in the City’s digital tech with those employed in two generic support/ auxiliary categories. These ‘other’ SIC categories contain sizeable numbers of employees. It may be the case that, like Google and Spotify, some of the City’s digital tech firms form part of these less precise groupings.

 

 

The Information and Communication is a small but growing segment of the City’s economy, whose capacities to spark innovations in finance and insurance mean that its clout could be larger than SIC-based employee counts imply. The increasing use of digital skills by FS firms suggest that tech employees will continue to play a crucial role supporting, and integrating into, the wider cluster of finance and insurance businesses.

 

[1] https://data.london.gov.uk/dataset/long-term-labour-market-projections

[2] http://colresearch.typepad.com/colresearch/2017/10/jobs-growth-in-the-city-of-london-1.html

[3] http://www.techcityuk.com/wp-content/uploads/2016/02/Tech-Nation-2016_FINAL-ONLINE-1.pdf

[4] https://www.pwc.com/gx/en/industries/financial-services/publications/financial-services-technology-2020-and-beyond-embracing-disruption.html

[5] https://dupress.deloitte.com/dup-us-en/industry/financial-services/talent-technology-future-of-financial-services-survey.html

[6] https://home.kpmg.com/uk/en/home/insights/2017/10/value-of-fintech.html

[7] http://rss.onlinelibrary.wiley.com/hub/issue/10.1111/sign.2016.13.issue-3/

[8]http://eprints.lse.ac.uk/65211/1/Max_Mapping%20digital%20businesses%20with%20Big%20Data.pdf