Financial Services Firms Account for 9.6 per cent of GDP

Research out earlier in January, from TheCityUK, has shown that financial services accounts for a substantive 9.6 per cent of the UK’s GDP. This was up from 9.4 per cent in the previous year. When combined with professional services, the percentage contribution rises to 14.5 per cent, despite employing seven per cent of the country’s workers, although they make up 15 per cent of the capital’s total employment.

Firstly, this begs the question that with banks having such a significant impact on the UK economy, the Government and regulators need to be mindful that the industry continues to flourish and succeed in the UK.

In December, the European Parliament voted overwhelmingly to implement the Financial Transaction Tax, otherwise known as the Robin Hood Tax. 11 countries rubber stamped proposals to force ahead plans to introduce the tax, which is seen as wholly unpopular in the banking sector. The British Government has vetoed plans, mindful of the contribution banking does make to the UK economy and frightened of potentially scaring financial services companies to leave the UK, in favour of the more tax friendly South East Asia.

The second threat is ring fencing regulation. On 20th December, a parliamentary commission on banking standards announced the results of its investigation into the Chancellor’s ringfencing proposals. The consensus of the commission was that the Government’s rules don’t go far enough, urging the Government to leave the full separation of banks’ investment banking arms from their retail divisions as a future option.

However, this is a risky decision for the Government – myriad high street banks have threatened to leave the UK if legal separation of the two banking entities becomes even an option. The banks are reluctantly in favour of ringfencing, arguing that would provide the consumer as much protection as a full split. If ring fencing was pushed ahead and separation discounted, we may prevent a mass exodus of banks to Singapore and Hong Kong.

The balance of appeasing financial services companies, mindful of the economic contribution they make and jobs they create, with having to impose reform on a sector which was the cause of such a massive economic meltdown, is a hard one to make. Let’s hope the UK Government, the EU and the regulators all manage to get it right.