12/16/2014

Financial Services Industry - Introduction

This chapter - how the industry is structured and

INTRODUCTION TO SECURITIES & examines - key participants.
INVESTMENTS World economy - growing rapidly, becoming integrated
and interdependent – increase in trade and investment
flows.
Stock markets and investment instruments - not unique
FINANCIAL SERVICE INDUSTRY
to one country - increasing similarity in the instruments
ROLE IN THE ECONOMY that are traded on all world markets
& With this background - important to understand the core
PARTICIPANTS role that the financial services industry both within the
economy and key features of the global financial services
sector

Financial Services Industry - Introduction FINANCIAL SERVICES INDUSTRY – ROLE

Financial Services Industry – major contributor in
developed economy, employment & services and also in
earnings INVESTMENT
Number of organisations operating in financial services
industry is wide and varied. Each carries out a
CHAIN
specialised function. Understanding their role –
important to understand how the industry is organised FINANCIAL
and interacts
SERVICES RISK
In some cases, although each described as a
separate organisation - nature of financial
INDUSTRY
conglomerates may have divisions carrying out each
of these activities PAYMENTS
SYSTEM

FINANCIAL SERVICES INDUSTRY - FINANCIAL SERVICES INDUSTRY -

ROLE ROLE
Risk -
Investment Chain – i. Pooling of Investment risk, and,
i. Bringing together savers & borrowers; ii. Effective management of other risks through
ii. Allocating capital to the profitable ventures; Insurance and Derivatives.
iii.Providing mechanisms for savings; Organisation and Individuals against risks of
iv.Manage their savings over lifetime; weather conditions, thefts, burglary, accidents,
fidelity.
v. Raising productivity and competitiveness in the
economy – Local & Global Volatility of currencies, prices of shares, interest
rates, prices of commodities.

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FINANCIAL SERVICES
INDUSTRY - ROLE Financial Services Industry - Introduction
Payment Systems –
Mechanisms for management and
transmission of money safely and reliably. Financial Services
Transfer for commercial transactions within
and across borders.
Payments to and from Investors from
companies and organisations
Payments from lenders to borrowers and
vice versa. Wholesale /
Retail Services
Professional Services

Financial Services Industry – Wholesale Services Financial Services Industry – Retail Services
Traditional range of deposit accounts, lending
International Banking Cross-border banking transactions
Retail Banking and credit cards
Equity markets Trading of quoted shares
Range of life insurance and protection solutions-
Bond markets Trading of Govt, supranational or corporate medical insurance, critical illness, motor,
Insurance
property, income protection and mortgage
debt
protection
Foreign exchange Trading of currencies Investment accounts designed to capture
savings during working life & provide benefits
Derivatives Trading of options, swaps, futures & forwards Pensions
on retirement
Investment Services Range of investment products & vehicles -
Fund management Managing mutual, pension & insurance pooled
stock-broking to full wealth management
funds
services & private banking
Insurance Re-insurance, major corporate insurance Advice on financial matters to clients. Some
Financial Planning
and Financial Advice recommend financial products from the whole of
Investment Banking Tailored banking services to organisations- M the market, and others a narrower range of
& A, private equity products.

Financial Services Industry – Wholesale Services Financial Services Industry – Wholesale Services

 International Banking:- Banking activities that involve  Equity Markets: Facilitate trading of shares in quoted
cross-border transactions and Banking and financing companies.
of large Corporates.  Companies need to be listed on a stock exchange for
 Size of the Banks worldwide are ranked on two criteria quotation of their shares.
a) Based on their capital, and,  Stock Exchanges - ranked on the basis of the Market
b) Based on their size of Total Assets Capitalisation.
 Examples of International Banks are- Citibank, HSBC,  Market Capitalisation - Number of shares of all
Barclays, ING, ABN Amro, JP Morgan Chase, BNP companies listed on exchange multiplied by their rates
Paribus. quoted on the exchange. (Value of the shares listed on an
exchange)
 Noted Stock Exchanges - NYSE, London Stock Exchange,
Tokyo Stock Exchange, National Stock Exchange.

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Financial Services Industry – Wholesale Services Financial Services Industry – Wholesale Services
 Foreign Exchange Markets: Largest of all financial
 Bond Markets: Facilitate trading of markets - average daily turnover in excess of US $4
1. Domestic bonds issued by a) Companies & b) trillion.
Governments.  Forex - rate at which one currency is exchanged for another
2. International bonds issued by a) Companies, b) -set by supply and demand
Governments and c) Supra-national agencies.  Foreign exchange (Forex) rates - reflect prospects for
growth and comparative interest rates & have a substantial
 Bonds - Debt instruments impact on businesses involved in imports and/or exports.
 Bond markets – Larger in size and value of trading  Spot rate - rate quoted by a bank for the exchange of one
than equity markets currency for another immediately
 US has the largest bond market  Forward rate - rate quoted by a bank for the exchange of
 European markets - predominant in trading in one currency for another at some agreed future date.
International bonds Enables Companies to plan and budget more accurately.
 Market – Major Banks who buy and sell.

Financial Services Industry – Wholesale Services Financial Services Industry – Wholesale Services
 Derivatives Markets: - Trade a range of complex
products based on underlying instruments like  Fund Management: - Investment management of
currencies, interest rates, equities, commodities and portfolios for Pension Funds, Insurance companies and
credit risk. Mutual Funds.
 Derivatives based on these underlying elements -  US and Europe dominate the investment funds market
available on a) Exchange-traded market and b) Over- with a combined total of over US$40 trillion of funds
The-Counter (OTC) market. under management.
 US exchanges (Chicago Mercantile Exchange) -  Other areas of fund management - Private wealth
global turnover of the exchange-traded derivatives management, investment management services to
markets. institutions - companies, charities and local government
 Europe dominates - trading in OTC derivatives authorities
markets
 Hedge funds - Fastest growing forms of institutional
 Interest rate derivatives market - dominated by the
Euro and the US dollar. asset management
 UK - largest share of over-the-counter foreign
exchange derivatives turnover.

Financial Services Industry – Wholesale Services Financial Services Industry – Retail Services
 Investment Banks: - i) Provide advice for
 Insurance Markets:- Specialise in the management companies who want to float on the stock market,
of risk
and arrange finance to HNWI on investments
 World’s insurance market was worth US $3.7 trillion
 ii) Raise additional finance by issuing further shares
based on the value of insurance premiums written.
or bonds, or
 The largest insurance markets - US, Japan and the UK.
Lloyd’s of London is the largest insurance organisation in
 iii) Carry out Mergers and Acquisitions.
the world.  iv) Treasury and Cash Management for Corporates
 Lloyd’s names join together in syndicates and each and HNWI.
syndicate will write insurance, ie, take on all or part of an  v) Management of Trust, Pension Funds of
insurance risk. There are many syndicates and each Companies / HNWI.
name will belong to one or more  All the above areas- few investment banks.
 Most - Specialise to some degree & concentrate on
only a few product lines.

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Financial Services Industry – Retail Services Financial Services Industry – Retail Services
 Custodian Banks: specialise in safe custody services of  Retail Banks: a) taking deposits, b) lending funds to
shares and bonds on behalf of others, like fund managers, retail customers, c) providing payment and money
pension funds and insurance companies. transmission services.
 Activities include – i) holding assets in safekeeping, ii)  These banks - operate through a network of branches
arranging settlement of securities, iii) collecting income from and now increasingly providing internet and telephone
assets – (dividends and interest), iv) providing information of banking services.
annual general meetings, v) managing cash transactions, vi)  In the UK, the sector has gone through a period of
performing forex transactions where required; and vii) consolidation. Economies of scale, search for
providing regular reporting on all their activities to their diversification, cost reduction and competition are all
clients expected to drive this consolidation further.
 Number of banks is expected to decline by more than
 Custodial business - a small number of global custodians -
two-thirds over the next decade
often divisions of investment banks who also offer other
services to their clients, like stock lending, measuring the
performance of the portfolios, and maximising returns on
surplus cash

Financial Services Industry – Retail Services

Financial Services Industry – Retail Services
 Insurance Companies: - collect premiums in exchange
 Savings Institutions: institutions that specialise in offering for the risk cover to allow risks to be managed
savings products to retail customers, also tend to offer a effectively.
similar range of services to banks.
 In UK, - known as Building Societies.  Protection planning - key area of financial advice
 Established in the 19th century.  Insurance industry provide – a) wide range of products to
 Small groups of people pool their savings, allowing some
meet potential scenarios, b) provide solutions more than
members to build or buy houses. the standard areas of Life Cover and c) General
Insurance cover.
 Building societies - jointly owned by individuals (Members)
having deposits or borrowed money from them  Products range - a) payment protection policies - in the
 Also described as mutual societies. event of an individual unable to meet repayments on
loans and mortgages, b) wide range of investment
 Recent times - smaller building societies merged or taken products and c) Structured products market by offering
over by larger ones.
guaranteed stock market-related bonds.
 Legislation introduced allowing building societies to become
companies – a process known as de-mutualisation.  Insurance industry controls 17% of the London stock
 Some large societies, - Nationwide and the Portman Building market
Society, remain as mutuals. Specialise in provision of deposit
accounts and mortgages.

Financial Services Industry – Retail Services Financial Services Industry – Retail Services
 Fund Managers: Also known as investment managers  Private Banking: - provide wide range of services
- run portfolios of investments for others. including wealth management, estate planning, tax
planning, insurance, lending, lines of credit, etc. -
 Some are organisations focussing solely on this activity; normally targeted at clients with a certain minimum
others - divisions of larger entities, like insurance investable cash, or minimum net wealth.
companies or banks.
 Private banking – offered by domestic banks and by
 Deal in shares, bonds and other assets - increase the those operating ‘offshore’.
value of their clients’ portfolios.
 Offshore - banking in a different jurisdiction to home
 Sub-divided into ‘institutional’ and ‘private client’ fund country - usually one with a favourable tax regime.
managers.  Distinction between private and retail banks -
 Private client managers invest the money of relatively gradually diminishing as private banks reduce their
wealthy individuals investment thresholds in order to compete for this
 Fund managers - charge a small percentage of the fund market while, many banks are expanding their
being managed. services to attract the ‘mass affluent’ and high-net
worth individuals.

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Financial Services Industry – Retail Services

 Financial Advisers (FA): Professionals who offer advice on
financial matters to clients
 FA - conduct a detailed survey of the client’s financial
position, preferences and objectives known as a ‘fact-find’ &
then advise appropriate action to meet the client's objectives
or, recommend a suitable financial product to match the
client’s needs.
 There are now four main classes of adviser:
• Tied advisors, who advise on the products of one financial
institution.
• Multi-tied advisors, who advise on the products of more than
one financial institution.
• Whole of market advisers, who advise on the products of all
companies active in that area and are paid by way of
commission on the products they sell.
• Independent financial advisers, who also advise on the
whole range of products on offer in the market, but who also
offer their clients the option to pay for advice by fee rather
than commission