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Financial Services Industry - Introduction

INTRODUCTION TO SECURITIES &

INVESTMENTS
FINANCIAL SERVICE INDUSTRY
ROLE IN THE ECONOMY
&
PARTICIPANTS

Financial Services Industry - Introduction

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

FINANCIAL SERVICES INDUSTRY ROLE

Investment Chain
i. Bringing together savers & borrowers;
ii. Allocating capital to the profitable ventures;
iii.Providing mechanisms for savings;
iv.Manage their savings over lifetime;
v. Raising productivity and competitiveness in the
economy Local & Global

This chapter - how the industry is structured and

examines - key participants.
World economy - growing rapidly, becoming integrated
and interdependent increase in trade and investment
flows.
Stock markets and investment instruments - not unique
to one country - increasing similarity in the instruments
that are traded on all world markets
With this background - important to understand the core
role that the financial services industry both within the
economy and key features of the global financial services
sector

FINANCIAL SERVICES INDUSTRY ROLE

INVESTMENT
CHAIN
FINANCIAL
SERVICES
INDUSTRY

RISK
PAYMENTS
SYSTEM

FINANCIAL SERVICES INDUSTRY ROLE

Risk i. Pooling of Investment risk, and,
ii. Effective management of other risks through
Insurance and Derivatives.
Organisation and Individuals against risks of
weather conditions, thefts, burglary, accidents,
fidelity.
Volatility of currencies, prices of shares, interest
rates, prices of commodities.

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FINANCIAL SERVICES
INDUSTRY - ROLE

Payment Systems
Mechanisms for management and
transmission of money safely and reliably.
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.

Financial Services Industry Wholesale Services

International Banking

Financial Services Industry - Introduction

Financial Services

Wholesale /
Professional Services

Financial Services Industry Retail Services

Traditional range of deposit accounts, lending

Cross-border banking transactions

Equity markets

Trading of quoted shares

Bond markets

Trading of Govt, supranational or corporate

Retail Services

Retail Banking

and credit cards

Insurance

Range of life insurance and protection solutionsmedical insurance, critical illness, motor,
property, income protection and mortgage
protection
Investment accounts designed to capture
savings during working life & provide benefits
on retirement

debt
Foreign exchange

Trading of currencies

Derivatives

Trading of options, swaps, futures & forwards

Pensions

Fund management

Managing mutual, pension & insurance pooled

funds

Investment Services

Range of investment products & vehicles stock-broking to full wealth management

services & private banking

Insurance

Re-insurance, major corporate insurance

Investment Banking

Tailored banking services to organisations- M

Financial Planning
and Financial Advice

Advice on financial matters to clients. Some

recommend financial products from the whole of
the market, and others a narrower range of
products.

& A, private equity

Financial Services Industry Wholesale Services

Financial Services Industry Wholesale Services

Equity Markets: Facilitate trading of shares in quoted

companies.
Companies need to be listed on a stock exchange for
quotation of their shares.
Stock Exchanges - ranked on the basis of the Market
Capitalisation.
Market Capitalisation - Number of shares of all
companies listed on exchange multiplied by their rates
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.

a)
b)

International Banking:- Banking activities that involve

cross-border transactions and Banking and financing
of large Corporates.
Size of the Banks worldwide are ranked on two criteria
Based on their capital, and,
Based on their size of Total Assets
Examples of International Banks are- Citibank, HSBC,
Barclays, ING, ABN Amro, JP Morgan Chase, BNP
Paribus.

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Financial Services Industry Wholesale Services

Financial Services Industry Wholesale Services

Bond Markets: Facilitate trading of

1. Domestic bonds issued by a) Companies & b)
Governments.
2. International bonds issued by a) Companies, b)
Governments and c) Supra-national agencies.
Bonds - Debt instruments
Bond markets Larger in size and value of trading
than equity markets
US has the largest bond market
European markets - predominant in trading in
International bonds

Foreign Exchange Markets: Largest of all financial

markets - average daily turnover in excess of US $4
trillion.
Forex - rate at which one currency is exchanged for another
-set by supply and demand
Foreign exchange (Forex) rates - reflect prospects for
growth and comparative interest rates & have a substantial
impact on businesses involved in imports and/or exports.
Spot rate - rate quoted by a bank for the exchange of one
currency for another immediately
Forward rate - rate quoted by a bank for the exchange of
one currency for another at some agreed future date.
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
currencies, interest rates, equities, commodities and
credit risk.
Derivatives based on these underlying elements available on a) Exchange-traded market and b) OverThe-Counter (OTC) market.
US exchanges (Chicago Mercantile Exchange) global turnover of the exchange-traded derivatives
markets.
Europe dominates - trading in OTC derivatives
markets
Interest rate derivatives market - dominated by the
Euro and the US dollar.
UK - largest share of over-the-counter foreign
exchange derivatives turnover.

Financial Services Industry Wholesale Services

Insurance Markets:- Specialise in the management

of risk
Worlds insurance market was worth US $3.7 trillion
based on the value of insurance premiums written.
The largest insurance markets - US, Japan and the UK.
Lloyds of London is the largest insurance organisation in
the world.
Lloyds names join together in syndicates and each
syndicate will write insurance, ie, take on all or part of an
insurance risk. There are many syndicates and each
name will belong to one or more

Fund Management: - Investment management of

portfolios for Pension Funds, Insurance companies and
Mutual Funds.
US and Europe dominate the investment funds market
with a combined total of over US$40 trillion of funds
under management.
Other areas of fund management - Private wealth
management, investment management services to
institutions - companies, charities and local government
authorities
Hedge funds - Fastest growing forms of institutional
asset management

Financial Services Industry Retail Services

Investment Banks: - i) Provide advice for
companies who want to float on the stock market,
and arrange finance to HNWI on investments
ii) Raise additional finance by issuing further shares
or bonds, or
iii) Carry out Mergers and Acquisitions.
iv) Treasury and Cash Management for Corporates
and HNWI.
v) Management of Trust, Pension Funds of
Companies / HNWI.
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

Custodian Banks: specialise in safe custody services of
shares and bonds on behalf of others, like fund managers,
pension funds and insurance companies.
Activities include i) holding assets in safekeeping, ii)
arranging settlement of securities, iii) collecting income from
assets (dividends and interest), iv) providing information of
annual general meetings, v) managing cash transactions, vi)
performing forex transactions where required; and vii)
providing regular reporting on all their activities to their
clients
Custodial business - a small number of global custodians 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

Savings Institutions: institutions that specialise in offering
savings products to retail customers, also tend to offer a
similar range of services to banks.
In UK, - known as Building Societies.
Established in the 19th century.
Small groups of people pool their savings, allowing some
members to build or buy houses.
Building societies - jointly owned by individuals (Members)
having deposits or borrowed money from them
Also described as mutual societies.
Recent times - smaller building societies merged or taken
over by larger ones.
Legislation introduced allowing building societies to become
companies a process known as de-mutualisation.
Some large societies, - Nationwide and the Portman Building
Society, remain as mutuals. Specialise in provision of deposit
accounts and mortgages.

Financial Services Industry Retail Services

Fund Managers: Also known as investment managers
- run portfolios of investments for others.
Some are organisations focussing solely on this activity;
others - divisions of larger entities, like insurance
companies or banks.
Deal in shares, bonds and other assets - increase the
value of their clients portfolios.
Sub-divided into institutional and private client fund
managers.
Private client managers invest the money of relatively
wealthy individuals
Fund managers - charge a small percentage of the fund
being managed.

Financial Services Industry Retail Services

Retail Banks: a) taking deposits, b) lending funds to
retail customers, c) providing payment and money
transmission services.
These banks - operate through a network of branches
and now increasingly providing internet and telephone
banking services.
In the UK, the sector has gone through a period of
consolidation. Economies of scale, search for
diversification, cost reduction and competition are all
expected to drive this consolidation further.
Number of banks is expected to decline by more than
two-thirds over the next decade

Financial Services Industry Retail Services

Insurance Companies: - collect premiums in exchange
for the risk cover to allow risks to be managed
effectively.
Protection planning - key area of financial advice
Insurance industry provide a) wide range of products to
meet potential scenarios, b) provide solutions more than
the standard areas of Life Cover and c) General
Insurance cover.
Products range - a) payment protection policies - in the
event of an individual unable to meet repayments on
loans and mortgages, b) wide range of investment
products and c) Structured products market by offering
guaranteed stock market-related bonds.
Insurance industry controls 17% of the London stock
market

Financial Services Industry Retail Services

Private Banking: - provide wide range of services
including wealth management, estate planning, tax
planning, insurance, lending, lines of credit, etc. normally targeted at clients with a certain minimum
investable cash, or minimum net wealth.
Private banking offered by domestic banks and by
those operating offshore.
Offshore - banking in a different jurisdiction to home
country - usually one with a favourable tax regime.
Distinction between private and retail banks gradually diminishing as private banks reduce their
investment thresholds in order to compete for this
market while, many banks are expanding their
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 clients 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
clients 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