Main Costs and Benefits of the Financial Sector of the UK - Case Study Example

Running header: UK Banking Sector Student’s name: Instructor’s name Subject code: Date of submission: Assess the main costs and benefits of the financial sector of the UK The financial sector of the UK is comprised of banks, credit unions, credit card companies, insurance companies, consumer finance companies, stock brokerages, real estate funds, investment funds and accountancy companies among other firms. Over the recent past, the UK financial sector has come up to become a great force to reckon with not only in the continent but also in the globe. This is due to the niches that exist in the system and the benefits that accrue to those marketers and investors who are part of it. Those who have taken part in it have borne witness to this. After the occurrence of the financial crash, the main objectives of the UK financial sector is to ensure that the banks there are safer for their customers and also to see to it that they increase their lending levels. This would be through averting losses that were made and costs that the customers were paying for banking and other financial services. This has been fostered through increasing the number of banks that offer loans to their customers and lowering the borrowing rates to the customers to as to encourage them to borrow more. Through this, they would stabilize in operations. Some of the costs that are associated with the financial system of the UK all arose out of the 2007-8 financial crises. The costs include that all banks are required to have capital ratios. This is to further reduce the possibility of occurrence of another crisis and if it occurs, the effects will be minimal to the financial sector of the country and hence lower losses will be experienced. The government states that failure of putting in place in time of support measures, the economic and social costs in the financial sector would be so much and difficult to envision. It is estimated that reforms that should occur in the financial sector to meet the regulations could cost the sector up to £7 billion. This is representative of implementation funds. According to bankers, this figure could be higher at a value of £10 billion. The costs will eventually be transferred to customers and this could make it more expensive to access banking and other financial services. The main objective of the reforms is to avoid taxpayer bail outs by the banks which have become the norm but the removal will be a lengthy process for it to be successfully implemented. Statistics show that since year 2007, an amount totaling £1.162 trillion has been committed to spending at different bailouts by the UK to the banks in the country. There has however been a fluctuation in the figure such as in the year 2011, the amount was £456.33 billion. This amount is comprised of 123.93 billion being is loan amounts and share purchases all of which required huge cash injections by the government. The other amount 332.4 billion was comprised of guarantees and indemnities both of which had not been adequately paid out. All these were traced back to the financial crisis. Regulation is one factor that has been implemented in the financial system. Regulation according to economists involves a change of the culture of the people. This includes for both within the organization and outside the organization. It advocates for increased accountability for all stakeholders and for those in the leadership positions. This seeks at seeking at arriving at a balance between all the risks that are involved and the rewards that are made out of a job. Through seeking balance, all extremes both in the risks and the rewards are well mediated and catered for in a cost effective means. Implementation of regulation policies will have adverse effects however to the wider economy. This can be classified into three categories. They are cost, competition and impact. Increase of the costs of banking results to a reduction in the borrowing ability of the people in the economy at large. It also makes it difficult for the smaller businesses to make and access credit facilities. This is the effect of the costs on the wider economy. In the long term, it reduces the gains and profitability levels of the ventures. It also makes the levels of competition to be unfit for the development of the business venture. Improper implementation of the regulations makes it difficult for the goals that are set of the regulation of having safer banks from being attained. It also reduces the levels of accountability in the process. Through this, the eventual outcomes are not healthy for all the parties involved both in the banking system, the customers, the external environment and the government. According to economists, such factors as this could add up to the costs of banking for the public and the other costs of normal disruptions that are witnessed in the working markets. As such, strategies need to be put in place to see to it that such are eliminated completely. There are many benefits that players in the UK financial sector have to gain. The first benefit is that the UK is the world’s largest leading exporter of services in the financial industry and other professional services. As a result of this also, it boasts of a trade surplus of£71billion as by the year 2013.this makes it to be a very fertile ground for all the players in the market ranging from investors, to customers and all business ventures interested in it. The UK is also the largest source of insurance funds and pensions in the whole of Europe. The UK also boasts of being the country that investments in financial technology are growing at the highest rates in the world. This makes it emerge as a strong market for those people who are interested in investment banking and mostly investment technology. This provides a perfect setup for all parties and stakeholders to work in. The country is also a leading force in the global financial services delivery and it is also the sole most internationally focused financial market place in the world. This gives all parties involved much to gain in terms of quality and value of services. The United Kingdom also accounted for up to 41% of the global foreign exchange trading as by the month of April 2013. By this, it had overtaken global players such as the USA, Japan and Singapore. This hence made it to be defined as the global center for financial exchange in that year. This has encouraged global players to trade in the country as the environment is conducive for the financial exchange and advisory services more than any other country in the world. Financial advice has been confirmed as being of best standards than any other country in the world. Another benefit that accrues from the financial sector in the United Kingdom is the fact that the UK is the leading western country and the biggest center in the whole of Europe for Islamic finance. This makes it to be an all religious market where all religions are well established and well thriving in trade. The Islamic finance has in the UK been reported to have assets in trade of up to US$19 billion. This is a very high figure as compared to other countries in the west and also in Europe and hence its strength in the financial sector. There are many factors that have resulted to the great success that has been reported in the UK financial sector. One of the factors is the presence of cities which have a global financial impact. Beginning with London, it is a global force to reckon with. It strategic position has made it to be the European center of business. Other cities in the country which have helped it gain the success include Manchester, Liverpool, Birmingham, Norwich, Cardiff, Leeds, Belfast, Edinburgh and Glasgow. They are form all from the constituents of the kingdom which is England, Wales, Scotland and Northern Ireland. The UK also boasts of having up to 28000 regulated companies in the financial services. These are services ranging from investment to banking. Such firms include lending businesses, investment firms, banks, general insurance companies together with other similar associated financial support service providers. This is a record high number globally. The general insurance companies alone in the country are 976 which is also a record high number. These are all clear indicators of the market that exists in the United Kingdom for financial services and the indicator for the success that the United Kingdom boasts of in the financial sector. There are many enticing factors for global investors as to entry into the market. Some of the factors include the presence of liquid capital markets in the United Kingdom. This makes way for all investors to seek to join the market. The geographical position of the Kingdom and the language which is in use in the market is a globally recognized one. The market also has a trait of being very transparent in all the strategies and operations. Through this, cases of fund misuse and misappropriation are eliminated. There is also the presence of a robust legal and regulatory framework. In order to protect the banking system in the country from further losses and also in order to meet the new safety criteria, some strategies have been put in place by the Bank of England. All the banks outside Europe may with time need to operate as subsidiaries. These subsidiaries will in turn be operated by the UK Prudential Regulatory Authority (PRA). They would however not operate as branches. These branches are governed by the headquarters back in their home countries. The difference that arises between these subsidiaries and branches is that they are capitalized separately and this hence means that they hold more capital within the borders of the country and are hence termed as a safer result. The conversion of a branch to a subsidiary is an expensive and a lengthy procedure. It is estimated that a one off cost of £525000 in conversion costs. Annual costs that will be incurred subsequently add up to a high of £150000. These are only the direct costs that are incurred. Other indirect costs are also incurred in the process. These are costs that are difficult to identify and quantify. Impacts of such a transfer will also be felt on the levels of competition. Some forms are even said to be on their way out of the British market as a result of the unfair competition that is created. REFERENCES MAYES, D. G., & WOOD, G. E. (2013). Reforming the governance of the financial sector. London, Routledge. HULL, R. (2011). The third sector. Bingley, U.K., Emerald. http://www.emeraldinsight.com/2046-6072/1. KAWAI, M., & PRASAD, E. (2011). Asian perspectives on financial sector reforms and regulation. Tokyo, Asian Development Bank Institute. NORTON, J. J., & HADJIEMMANUIL, C. (2005). Global financial sector development. London, British Institute of International and Comparative Law. Read More