Introduction: The Financial Services Sector

Financial Markets

• The financial services sector has two distinct areas: wholesale and retail sectors.
• Wholesale sector is also known as the professional or institutional sector.
• Wholesale financial markets involve:
  • Equity markets (trading of quoted shares)
  • Bond markets (trading of government, supranational, or corporate debt)
  • Foreign exchange (trading of currencies)
  • Derivatives (trading of options, swaps, futures, and forwards)
  • Insurance markets (major corporate insurance, reinsurance, captive insurance, and risk-sharing insurance)

Wholesale Sector

• Wholesale sector includes:
  • Fund management (managing investment portfolios of collective investment schemes, pension funds, and insurance funds)
  • Investment banking (banking services tailored to organisations, including mergers and acquisitions, equity trading, fixed-income trading, and private equity)
  • Custodian banking (provision of services to asset managers, including safekeeping of assets, administration of underlying investments, settlement, and corporate actions)

Bond Markets

• The global bond market exceeds $128 trillion in value, with sovereign, supranational, and agency debt accounting for 68% and corporate bonds making up 32%.
• Bonds traded range from domestic bonds to international bonds issued by companies, governments, and supranational agencies.

Foreign Exchange (FX) Markets

• FX markets are the largest of all financial markets, with an average daily turnover of $7.5 trillion.
• The rate at which one currency is exchanged for another is determined by supply and demand.
• FX markets are provided mostly by major banks, with each providing rates of exchange at which they are willing to buy or sell currencies.
• FX trading is concentrated in a small number of financial centres, with the UK being the main centre.

Derivatives Markets

• Derivatives markets trade complex products based on underlying instruments, including currencies, indices, interest rates, equities, commodities, and credit risk.
• Derivatives are available on both exchange-traded and over-the-counter (OTC) markets.
• The largest exchange-traded derivatives market is the Chicago Mercantile Exchange (CME), while Europe dominates trading in OTC derivatives markets.

Retail Sector

• Retail sector focuses on services provided to personal customers, including:
  • Retail banking (traditional range of current accounts, deposit accounts, lending, and credit cards)
  • Insurance (provision of life assurance and protection solutions)
  • Pensions (provision of investment accounts designed to capture savings during working life and provide benefits on retirement)
  • Investment services (range of investment products and vehicles, including execution-only stockbroking, wealth management, and private banking)
  • Financial planning and advice (helping individuals understand and plan for their financial future)

Equity Markets

• Equity markets are the name given to stock markets where quoted shares of companies are traded.
• Global market capitalisation was over $100 trillion at the end of 2022.
• The largest exchange in the world is the New York Stock Exchange (NYSE), with a domestic market capitalisation of over $24 trillion.

Insurance Markets

• Insurance markets specialise in the management of personal risk, corporate risk, and protection of life events.
• The largest insurance markets are the US, China, and Japan.
• The market is led by a number of major players, including China Life, Allianz, and AXA.

Other Financial Institutions

• Retail/commercial banks provide services to retail customers, including deposit-taking, lending, and payment services.

• Savings institutions, such as credit unions and building societies, offer savings products and other services to retail customers.

• Peer-to-peer (P2P) lending and crowdfunding are emerging alternatives to traditional banking, allowing individuals to lend and borrow directly.### Debt Crowdfunding

• Investors lend money and receive it back with interest

• An alternative to traditional funding methods

Equity Crowdfunding

• People invest in exchange for equity or shares in the venture
• Start-ups seek funding from a large number of people to enhance brand loyalty
• Advantage of having many funders: diffuses pressure from large investors and turns small investors into brand ambassadors

Insurance Companies

• Provide solutions for managing risks
• Offer a variety of products, including life cover, general insurance cover, and payment protection policies
• Collect premiums and invest in equities and bonds
• Hold cash to satisfy claims and liquidate investment holdings if necessary

Pension Funds

• A key method for individuals to make provision for their retirement needs
• Types: company pension schemes, self-directed schemes, and personal retirement schemes
• Accumulated funds are used to provide a pension at retirement
• Invest in shares, bonds, and physical assets like property to meet their aim of providing a pension

Fund Managers

• Run portfolios of investments for others
• Invest money held by institutions and individuals
• Global asset management industry has over $90 trillion of funds under management
• Buy and sell shares, bonds, and other assets to increase client portfolio value
• Subdivided into institutional and private client fund managers

Platforms

• Provide facilities for investments to be bought and sold
• Arrange custody for clients' assets
• Offer wide ranges of mutual funds, pension plans, and insurance bonds
• Examples: Cofunds and Hargreaves Lansdown
• Earn income by charging for services

Private Banks

• Provide a wide range of services, including investment management, for clients
• Offer wealth management services, including investment advice and portfolio management
• Charge for managing clients' money

Stockbrokers and Wealth Managers

• Arrange stock market trades on behalf of clients
• Divide into four main categories:
  • Execution-only stockbrokers: offer telephone or internet-based trade execution and settlement
  • Robo-advisers: provide automated, algorithm-based portfolio management advice
  • Advisory and discretionary wealth managers: offer wealth management services to private investors
  • Institutional brokers: arrange trades on behalf of large institutions

Platforms

• Online services used by intermediaries to view and administer clients' investment portfolios
• Offer tools to analyse client portfolios and choose products
• Examples: fund supermarkets

Investment Banks

• Provide advice and arrange finance for companies wanting to float on the stock market
• Offer services for institutional firms investing in shares and bonds
• Typically provide finance-raising and advisory work, securities-trading, and treasury dealing services
• Investment management for sizeable investors, such as corporate pension funds and wealthy private clients