Financial Intermediation

Introduction

Source Denis Oates, Corporate Photographer

Generally regarded as a high value added sector within which employment is skewed towards professional, managerial and other white collar jobs, the Financial Intermediation industry comprises establishments primarily engaged in financial transactions (that is, transactions involving the creation, liquidation, or change in ownership of financial assets) and/or in facilitating financial transactions.

Financial intermediation activities include banking and other forms of finance such as building societies, financial leasing and other forms of credit granting by non-deposit taking finance houses, including hire purchase and loan companies, venture and development capital companies, unit and investment trusts, etc., together with insurance and pension functions (but excluding compulsory social security) and a range of auxiliary services including security broking and fund management, mortgage and insurance brokers and agents, loss adjustment, bureaux de change, etc. In addition, monetary authorities charged with monetary control (i.e. central banking) are also included in this sector. Traditionally the industry has been defined in terms of the various institutions, which make up the sector. However, major developments and structural changes over the past couple of decades have blurred many of the former distinctions between the different types of financial organisations and increasingly financial services are being described in terms of functions irrespective of the kind of institution that provides them.

Employment

The financial services industry in Lancashire employs about 11,200 people, equivalent to 1.9% of the sub-region's total employee workforce. This is well below the 4.0% share that the industry has in Great Britain at large though it should be remembered that the national representation is heavily skewed by the dominating presence of London and the South East which between them account for 42% of all jobs in financial intermediation. In common with most other service sectors, females comprise the largest element of the employee workforce, accounting for 58% of the total, of whom a about a fifth work on a part-time basis (Table 1). The majority of males are full-time employees.

Figure 1 Financial Intermediation: Employment by District, 2005

Source ONS - Annual Business Inquiry

Of the total financial services jobs in Lancashire about a quarter are based in Preston, the largest single financial centre with a further 23%% split between West Lancashire and Fylde (Figure 1). The local importance of the industry is also greatest in Preston where it accounts for 3.2% of the district's employee jobs, followed by West Lancashire where it makes up 3.1%. Its impact is least in South Ribble where it provides for only 0.7% of local jobs followed by Ribble Valley and Rossendale (both with 0.8%).

Figure 2 Employee Jobs in Financial Intermediation as a Percentage of All Employee Jobs, Lancashire Wards, 2005

Source ONS - Annual Business Inquiry, 2005

The distribution of financial intermediation employee jobs across Lancashire by ward is illustrated in Figure 2. Across most parts of the sub-region such jobs contribute a relatively tiny part of the employment base and key concentrations are associated with larger individual establishments rather than reflecting any form of clustering. Most town centres have above-average proportions, presumably reflecting in part the need for accessibility for consumer financial services such as banks and building societies but the generic nature of many such services means that such accessibility is not always a key driving force and there is a wide spread of locations in many suburban and out-of-town locations also.

In general, the industry is highly fragmented and unit sizes are fairly small – averaging about 10 employees – and comprise a large proportion of branch outlets and small independent businesses or agents. In total more than 97% of the estimated 1,080 financial services business units in Lancashire employ fewer than 50 people and 80% employ less than ten (Table 2). The top sized companies with 100 or more employees account for nearly a third of the employee jobs in the sector.

Figure 3 Financial Intermediation Establishments, 2005

Source ONS - Annual Business Inquiry, 2005

In addition to the ubiquitous High Street banks and building societies, the local sector comprises a handful of larger employers such as the HM Treasury Bonds & Stocks Office (National Savings) in Blackpool; Aegon UK and Guardian Financial Services in Lytham St Annes and Axa Insurance in Lancaster providing general insurance; the Co-operative Bank headquarters in Skelmersdale; Aviva and Chesnara (Countrywide Assured) dealing in life assurance in Preston; Auto Indemnity of Blackpool dealing with motor insurance claims; Fortis Private Investment Management in Blackpool; Key Retirement Solutions of Preston providing equity release schemes; and Legal & Trade Collections Ltd, also based in Preston.

Figure 4 Change in VAT-Registered Finance Business, 1994-2006

Source Small Business Service - VAT Registrations and De-registrations

It is likely that many branch establishments will have their VAT registration based outside Lancashire but amongst locally based businesses there are an estimated 345 financial services companies registered for VAT. These make up less than 1% of the total Lancashire business stock though it is an expanding sector with the number of registered financial services businesses growing by over 60% between 1994-2006 – a faster pace of increase than in the UK at large (Figure 4). In all but two years over this period the rate of new business formation in financial services has been higher in Lancashire than in the UK. This was only partly offset by a slightly lower business survival rate in Lancashire than nationally.

Employment Trends

The number of people employed in Lancashire's financial services rose steadily from around 5,000 in 1950 to over 15,000 at the start of the 1980s with much of the expansion occurring in the late 1960s and 1970s. Nationally the 1980s were an exceptionally buoyant time for the industry with the workforce expanding by a third before the post-1990 economic downturn under-cut the demand for financial services and at the same time exposed serious problems of over-capacity. In Lancashire the industry performed less well. Though it enjoyed a short spurt of growth in the late 1980s, employee numbers peaked in 1989 at about 16,000. Subsequently the trend has been largely downwards (Table 3).

Between 1991 and 2005 recorded Lancashire employee job numbers in financial intermediation fell by some 4,000 or by more than a quarter. In practice the reduction was probably even greater as there is strong evidence from the introduction of the Annual Business Inquiry that there was a consistent under-estimate of financial services jobs in the earlier Annual Employment Surveys. The bulk of the job losses were initially felt in the more mature retail banking sector (including both banks and building societies) following a wave of mergers and acquisitions and subsequent branch closures and efficiency drives. Later, job cuts were also experienced in local HM Treasury operations and in insurance and pension activities too as re-structuring took pace and many jobs were out-sourced. Employment in the "other" or auxiliary financial intermediation category which includes such services as financial and insurance agents/brokers, security broking, fund management, etc. showed some growth, albeit from a relatively small base and in large measure was probably a reflection of the increased tendency amongst many financial institutions to use independent agents/advisors in place of in-house staff and the growth of new financial services such as consumer debt management and recovery. In 2005 this section of the industry saw further jobs expansion.

General Characteristics

The savings/investment process in market economies is organised around financial intermediation, making the institutions that provide such services a key facilitator of economic growth. Nationally the financial services sector makes a major contribution to the economy, employing more than 1 million people and accounting for about 8.8% of Gross Value Added (Lancashire = 3.2%). The heart of the industry is based in London which is by far the largest international centre in Europe. Lancashire has never had an especially strong stake in the financial services industry, partly, presumably because of the proximity of Manchester which has been better placed to offer the more specialised services demanded by larger regional businesses and organisations. Locally, the sector is dominated by retail banking offering such services as savings, investment, portfolio management, consumer credit, mortgage and payment and advisory/brokerage services. Employment in the industry is skewed towards professional, managerial and clerical functions.

Three principal types of activities are generally recognised within the broad structure of the financial services industry:

• The raising of funds by taking deposits and/or issuing securities and, in the process, incurring liabilities. Establishments (e.g. banks) engaged in this activity use raised funds to acquire financial assets by making loans and/or purchasing securities. They channel funds from lenders to borrowers and transform or repackage the funds with respect to maturity, scale and risk. This activity is known as financial intermediation.
• Pooling of risk by underwriting insurance and annuities. Establishments engaged in this activity (e.g. insurance companies) collect fees, insurance premiums, or annuity considerations, build up reserves, invest these reserves, and make contractual payments. Fees are based on the expected incidence of the insured risk and the expected return on investment.
• Providing specialised services or supporting financial intermediation, insurance and employee benefit programmes.

The demand for financial services is determined by demographic and savings trends, deregulation and liberalisation of capital markets and changing patterns of consumption. Over recent years, increasing consumer demand for improved choice on the back of rising incomes and the need for more sophisticated services by industry and commerce, both directly and via sub-contracting to outsiders financial services formerly provided in-house together with increasing globalisation of the industry and its corporate customers have been key drivers.

Over the past twenty years the banking and financial services industries have experienced dramatic changes resulting in pressures for the adoption of new business structures and processes. For example, there has been a lowering of regulatory barriers between the banking, insurance and brokerage sections of the industry. Intensifying competition from new entrants, a new regulatory framework, the burgeoning role of technology and increasingly sophisticated and mobile customers have placed great pressure on traditional credit institutions. As well as forcing changes in market structure technology advances are having a significant impact on the way that financial services are provided and accessed such as through telephone and screen-based banking and particularly through the Internet. New technologies have also lowered the cost of entry and turned many financial products into commodities, enabling other providers such as supermarkets and other retailers to enter or compete in new markets. All this is helping to redefine the roles of individual companies and relationships with their customers.

As a consequence of these changes, distinctions between financial organisations have blurred or disappeared making it more difficult to define what is meant by a "bank" and the mix of occupations in the sector have changed. Market forces now play a decisive role in the functioning of financial systems which for long had been protected and subject to restrictive regulations. Institutions are paying greater attention to market-orientated strategies and operations are yielding more effective services and product innovations. Many have become much more global in their outlook. Rationalisation, including mergers and acquisitions and reductions of branch networks probably still has further to go and more job losses are expected, but these are likely to offset to some extent by the spread of new delivery services like telephone and electronic banking.

This page was compiled by Peter Kivell.

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