The financial services industry
The Financial Services Industry
Definition and Role
- The financial services industry refers to diverse sectors dealing with the management of money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer finance companies, stock brokerages, investment funds and some government sponsored entities.
- The industry performs a crucial role in the global economy, directing money from entities that have surplus funds to those who are in need.
- Financial intermediaries help match borrowers with lenders and provide a secure framework for transactions to take place.
Types of Financial Institutions
- Commercial banks accept deposits, provide loans and offer basic investment products.
- Investment banks primarily assist businesses in acquiring funds and provide various services such as mergers, acquisitions and asset management.
- Insurance companies provide financial protection against potential losses.
- Credit unions are non-profit organisations that serve members who have common professional or personal ties.
Regulation of Financial Services
- In the UK, the Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA) are the major regulatory bodies in financial services.
- The FCA is responsible for conducting regulation, ensuring that business across the financial industry meet certain standards of behaviour.
- The PRA is responsible for prudential regulation, ensuring that banks, insurance companies and other financial institutions have enough capital to meet their liabilities.
Key Trends in Financial Services
- Digitisation has significantly transformed the financial services industry, with online banking, digital payment systems and robo-advisers becoming increasingly popular.
- Globalisation has led to an increasingly interconnected financial services industry.
- Regulatory changes post-financial crisis have led to a focus on transparency and consumer protection.
- Financial technology (Fintech) startups represent a significant emerging trend in the industry, offering competition to traditional firms via innovative services.
Importance of Financial Literacy
- Understanding financial concepts like compound interest, investment risk, and diversification can help individuals make informed decisions and achieve their financial goals.
- Knowledge in financial services ensures better understanding of wider economic factors that might affect personal finances or business affairs.
- It also promotes sustainable financial well-being and encourages responsible borrowing and saving strategies.