of Comparative

Advantage for
Financial
Services Exports
from UK
 State of Financial Services Industry in
UK
London and the wider UK is the leading global international financial and related
professional services Centre.
2.2mand
people work
related
in the financial
professional
TAX CONTRIBUTION OF UK
FINANCIAL 71.4
SERVICES
services across the UK Financial services
comprising 7.3% of regional 66.5
6565.6 continues to be a large
employment 63 contributor to UK tax
IN BILLION POUNDS
receipts. In 2015/16
176bn It contributed a total of
contributed to the UK economy
in 2015,representing 10.7% of 71.4 billion to the
GVA Exchequer, accounting for
Source: City of London Corporation,pWc
11.0% of total tax
receipts.
2/ FDI Projects in Financial 41975
of those Employed on Services
Source: in UKTrade, 561
Department of International

3 the industry work

outside London in key
UK 13.9 34921

10.2
centers in Edinburgh,
Birmingham,

$97b Manchester & Leeds 515

n2015 was more than the combined

UKs financial services trade surplus
in
2014/15 2015/16 2014/15 2015/16 2014/15 2015/16
surpluses of the next four leading UK has been a prime destination for FDI among
countries (US, Switzerland, Europe garnering 13.9 billion pounds in 2015,9%
Luxembourg and Singapore). increase from 2014.Number of projetcs and new
UK Financial Services Export Overview
United Kingdom is the worlds largest exporter of Financial Services with London being the worlds
Financial Centre along with New York.
Financial Services export fro the UK accounts for one third of all services exports
UKs exports had seen a decline due FS Exports from UK (thousand $) Trade Dependence Index
to the Europe wide banking crisis
84,716,182 3.8
since 2011,which saw a decline in 3.7
demand for financial services. 81,944,600 81,857,891 3.6
3.5
79,145,145 3.4
78,445,774
3.3
As Europe started stabilizing along
3.2
with UKs Pivot to emerging 3.1
economies to supply financial 3
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
services, growth in exports have
risen since 2013.
Export Propensity Growth Rate of Exports
3.20% 5.00%
Financial Services is seen as a major 3.10% 4.00%
3.00%
driver of growth for the UK Economy 3.00%
2.00%
as evident from the trade 2.90% 1.00%
dependence index. 2.80% 0.00%
2011 2012 2013 2014 2015
2.70% -1.00%
-2.00%
2.60%
-3.00%
2.50% -4.00%
Due to development of regional 2011 2012 2013 2014 2015
clusters outside London, reverse
outsourcing has been
The UKs largest taking
trading place are the US and other EU Member States. In addition, other advanced
partners
due to widening
economies, such cost differential Japan,
as Switzerland, for Australia and Canada feature prominently in UK trade, as do emerging
labor acrosssuch
economies UK. as China, the UAE and India and other international financial centres such as Hong Kong and
 International Financial Markets in UK
nancial Industry is a global market leader in many categories of financial business
BANKI FX INSURA
NG London has over 250 foreign MARKET
UK accounts for the highest NCE The UK insurance industry is
banks more than its nearest turnover for global foreign the largest in Europe and
rivals New York, Paris or exchange trading. According to third largest in the world.
Frankfurt.
3rd Largest BIS, it accounted for 37% of the London accounts for around a 10%
banking assets in the world.
largest center for cross-border Twice asglobal
manyshare in Aprilare
US dollars 2016
traded on share of total world reinsurance
banking, with 16% of the outstanding the foreign exchange market in the UK The London Market is the worlds
value of international bank lending than in the US. leading market for internationally
Around half of European investment More than twice as many euros are traded insurance and reinsurance.
banking activity is conducted in London. traded in the UK than in all the euro-area
EQUITY & BOND FUND combined
countries MANAGEMENT MARITIME BUSINESS
The 518 SERVICES
MARKET foreign companies in The UKs pension assets-to- The UK is the leading center in
London Stock Exchange, accounts GDP ratio is among the the supply of a broad range of
for a fifth of the total global foreign highest in the world professional and business
listings
Its 6% share of global equity market Over $1.4 trillion is managed by UK mutual services to the global
capitalization and 2% of turnover funds leadingmaritime
center community.
in the international
London is the leading center for largest European center for the marine insurance market with a 29%
international bond trading with an management of PE share of global premiums
estimated 70% of secondary market & HF investments
turnover.
DERIVATIVES ISLAMIC FINANCE COMMODITY
The UK remains a leading
TRADING
derivatives center worldwide, with a
Around 20 banks, of which five TRADING
Major derivatives exchanges
are fully Sharia licensed, based located in London account
39% share of trading OTC interest- in the UK. This is more than in for around 15% of global
S is the onlyrate derivatives
other in 2016.
major location, with 41% of trading any other western country. trade in commodities
 UKs Comparative Advantage in Financial Services
Services trade is more sensitive to a countrys stock of highskilled and midskilled labor, more
receptive to the level of trust enjoyed by any importers, and more dependent on the quality of
regulatory governance practiced when liberalizing services sectors.
Also critical is UKs Geographical location which enables it to serve markets both east and west
s REVEALED
along with COMPARATIVE
the ease by which ADVANTAGE
the Euro region is served.
16
14
12
10
8
6
4
2
0
UK USA SWZ JPN LUX HKG GER SNG
2011 2012 2013 2014 2015

Revealed Comparative Advantage

figure shows in which sector does an
economy has comparative advantage.
RCA was calculated for major financial
centers of the world, where UK had a DETERMINANTS OF COMPARATIVE ADVANTAGE
value of around 6 for the past five
years, coming second only to the small
city state of Luxembourg.
This explains United Kingdoms
UKs Institutions & Regulations
Trade in Services is also largely determined by the trust and confidence that customers would have on the
origin country, which is largely affected by the quality of institutions in the exporter country.
To quantify it, we look at the World Bank Governance Indicators and compare UKs position with other
leading financial Centers
WORLD BANK GOVERNANCE
INDICATORS
Rule of Law: Percentile Rank
Control of Corruption: Percentile Rank Government Effectiveness: Percentile Rank
100 100 105

100
95 95
95
90 90
90
85 85
85
80 80 80
GBR USA HKG SWZ GER FRA LUX GBR USA HKG SWZ GER FRA LUX GBR USA HKG SWZ GER FRA LUX

Political Stability and Absence of Violence/Terrorism: Percentile Rank Regulatory Quality: Percentile Rank
Voice and Accountability: Percentile Rank
120 105
120
100 100
100
80 95
80
60 60 90
40 40 85
20 20 80
0 0 75
GBR USA HKG SWZ GER FRA LUX GBR USA HKG SWZ GER FRA LUX GBR USA HKG SWZ GER FRA LUX

These indicators measure, respectively, the quality of publicservices and policy formulation and the ability
of a government to provide sound policies enables and promotes private sector development in the
exporting country.
As evident from UKs score in various criteria, UKs position as a leading financial center stands on its
UKs Institutions & Regulations
These indexes show how national institutions can shape comparative advantage since specialization
depends onhowservices markets are effectively deregulated.
Analyzing the differences in these indexes can help us understand the differences in & flow of Trade from
countries.
OECD Services Trade Restrictiveness
LEGAL SERVICES AND DISPUTE
Index (STRI) 2016
RESOLUTION
2 of the largest law firms based on 0.35 Regulatory 0.35 Regulatory
headcount have their main base of 0.3 transparency 0.3 transparency
0.25 Barriers to
operation in the uK;200 law firms 0.2 competition
0.25 Barriers to
0.2 competition
have offices in the UK; English 0.15 Other
Other
0.1 discriminatory 0.15
Common law is the most widely 0.05 measures 0.1
discriminatory
measures
used legal system in the world, 0 Restrictions on 0.05
movement of Restrictions on
covering 27% of the worlds 320 labor 0 movement of
OECD Product Market
legal jurisdiction Restrictions on
Foreign Entry
labor
Restrictions on
Regulatory Index Foreign Entry

Consumer Banking Insurance

The Service Trade Restrictions Index (STRI) helps identify
which policy measures restrict trade. The STRI indices
take the value from 0 to 1, where 0 is completely open
and 1 is completely closed.

Comparing STRI values for both consumer banking &

insurance, it is evident that UK has the second least value
in both sectors, Germany being the least restrictive.
UKs Human Capital
According to Heckscher-Olins factor endowment theory, a country exports products/services
which uses its abundant capital.
Capital for financial services trade is the High-skilled labor which the UK has in abundance,
which till recently was due to free labor movement across Europe.
Londons quality of life was also a huge factor in attracting global talent.
LABOR PRODUCTIVITY AND COSTS,FINANCIAL
SERVICES Average Unit Labor Costs,2011-2015
Gross value added per hours worked,constant prices
120
110 110
105 100
100 90
95 80
90 Base Index 2010=100
85
base index 2010=100

Source:OECD.Stat

Source:OECD.Stat

Average Person Employed,2011-15 Average labor compensation per hour worked

106
104 115
102 110
100 105
98 100
96
94 95
Base Index 2010=100 90
85
Base Index 2010=100

Source:OECD.Stat

Source: OECD.Stat

The above Figures compares Labor Productivity & unit labor costs in financial services for major
financial centers of the world. UKs lags significantly behind other countries in productivity but
WEF-Global Competitiveness Index
The Global Competitiveness Report 2016-2017 assesses the competitiveness landscape of
138 economies, providing insight into the drivers of their productivity and prosperity.

Quality of management schools, Rank Country capacity to attract talent, Rank

45 50
40 40
35
30 30
25
20 20
15
10 10
5
0 0

Market size,Rank Innovation,Rank

120 30
100 25
80 20
60 15
40 10
20 5
0 0

UKs ranking on above factors on Quality of management schools, capacity to attract talent,
Market Size which provides economy of scale & Innovation points to the quality of Human
Capital it possess which gives it a comparative advantage as compared to other European
UKs ICT Capital
Competitiveness in Financial Services is largely determined by extensive use of cutting edge
Information and Communication
technology. According to World Economic Forums Global Competitive Index UK ranks second on
use of ICT and technological
UK as a Global HUB for FINTECH
readiness, which can be a source of comparative advantage for UK.
The UKs and Londons position as the leading global center ICT use,Rank
for FinTech is followed closely by California and New York. 25
20
While other centers lag far behind, there is increasing 15
10
competition from emerging FinTech hubs, particularly those in 5
0
Asia.
The UK has risen up to become the global FinTech capital
over the past decade.
According to EYs report UK FinTech: On the cutting edge,
WEF GCI
the UKs FinTech sector employed over 60,000 people and
generated around 6.6bn in revenue in 2015, or close to
a third of the global total. Technological readiness,rank
UK FinTech firms have secured $5.4 billion of the $49.7 18
16
billion of global FinTech investment in the five years to 14
12
2015, more than the total $4.4 billion raised across the rest 10
8
of Europe, according to research from Fintech Week 6
4
2
London. 0
Transaction value in the FinTech market is expected to
grow by over a fifth to $354 million by 2020.
London is one of the leading global financial hubs and
offers a wealth of talent and expertise.
WEF GCI
Also an effective network of FinTech centers throughout the
country, a strong venture capital base, tax breaks for start-
UKs Financial Services Export to EU
The UK benefits economically from having a strong financial and related professional services
sector that serves Europe.
Europe also benefits from having London-a truly global financial center, which helps European
businesses access capital at lower cost.
Customers in EU countries account for 19% of premium income on the London Market and
generate nearly half of annual general insurance premiums of the UK insurance industry
Euro denominated foreign exchange turnover in the UK makes up about 44% of worldwide euro
denominated foreign exchange trading. Euro trading in the UK has increased more than five fold
over the past decade.
EU FDI stock in the UK accounts for around a half of the total stock of UK FDI and has been

35 Of EU wholesale 11
growing. A substantial amount of FDI into Companies
companies using the UK as a entry pointmember
the UK from
to the EU
from
states
nonEurope
are listed
market. 41
EU countries is motivated
Of by
UKs trading
surplus in the

%
financial
Although
activity
EU citizens
takes place account
in 2 on the London Stock
for only 3.3%
Exchange %
of the UK population ,they make up financial
4.5% of the services
UK
labor force sector is accounted
London.
by the EU countries
Of European prime
$1.5 Of UK deposits
90 brokerage is
Tn
sourced from the
EU countries
accounted by
% London
69 Of worldwide euro 85 Of European based
denominated OTC trading Hedge Funds are
% of interest
derivatives happens in
rate % based in London.
UKs Financial Services Export to EU Impact of BREXIT
DIRECT EFFECTS ON FS
SECTOR
namely the impacts
of changes to
market access
arrangements that
result in an
increase in non-
tariff barriers in FS
trade, the impact of
a reduction in
migration into the
UK
UNCERTAINI
TY
The increase in uncertainty is One of the largest term,
likely to result in higher risk
premia on sterling- denominated
financial assets, including for
financial
This couldcorporates.
result in a short-term
deterioration in banks funding
costs, which is mitigated to
some extent by more recent
regulatory requirements to hold
The reduction in economic output and activity
associated with a potential UK exit from the EU
results in a negative impact on demand and
WIDER ECONOMIC
EFFECTS investment in the FS sector and the wider economy,
which leads to a reduction in employment.
from a slowdown in In the short-term, banks and other financial
output and activity institutions based in the UK could adapt to market
in other non-FS access restrictions, for example, by establishing
structures in the EU that would enable them to
industry sectors,
continue providing banking services to EU clients.
which have a over the long-term, the balance of factors that
negative knock-on influence businesses location decisions, including
impact on the FS market access to the EU, could tip in favour of
sector. relocation of some activities to other EU financial
hubs. This is likely to affect banks that have used the
UK as a hub to gain access to 27 other EU Member
States.
TRADE These factorsMIGRATION
combined couldand FISCAL
lead to a slowdown in
FS sector activity
Theand growth ininnet
themigration
UK over the long-
potential changes into the
leading to a gradual erosion of the UKs
UK result in significant negative status
impacts of the UK leaving the EU
as a regional financial
impacts centre.
for the FS sector, reducing FS
on the FS sector can be
attributed to the increase in NTBs GVA by around 1%-2% relative to the
as a result of the loss of counterfactual in both scenarios.
passporting rights and There are some benefits to UK GDP
restrictions on UK banks access from lower EU contributions. However,
to EU markets. there is a small negative impact on FS
As the sector adjusts in the long- GVA, i.e. around 0.2% under both
Policy Recommendations- Sustaining its Competitiveness

Adherence to Global Retain access to International

Adhere to Norms
global norms that are in place, or are Markets
Ensure that UK retains the
emerging, across the sector that allow cross- same level of access to
border activity, including but not limited to: international markets, and
Delegation of portfolio management recognised equivalence with
non-EU nations that is
Clearing of global reserve currencies currently granted as part of
the EU
Exemptions on intragroup margin requirements.
Ongoing Regulatory Orderly Transition Equivalence and
collaboration
Continued close collaboration Arrangements Grandfathering between the
on the future regulation Agree mutual
UK andrights
theof EU
access to
Ensure an orderly transition both the UK and EU clients and
direction.
giving firms at least five infrastructure with equivalence
Working within global forums
years following the agreements grandfathered
to pursue leading global
finalisation of the new where the UK shares common
standards in both the UK and
regime to ensure services to rules today, including but not
EU that are aligned with
customers are not impacted limited to:
international standards where
as the sector makes the Markets in Financial Instruments
appropriate.
necessary changes to Directive
Achieving future equivalence
operating models. European Market Infrastructure
through adoption of leading
global standards. Regulation
Consider UK inclusion in Payment Services Directive
Appendix & References
Department of International Trade, UK
HM Treasury, UK: FSTIB Annual Report 2015-16
Bank of International settlements, Triennial Central Bank Survey of foreign exchange
and OTC
Trademap.org
CityUK.org
OECD.Stat
World Bank Governance Indicators, Data
World Economic Forum, Global Competitiveness Index Data
OECD STRI Index, PMRI Index Data
EY Report on UK Financial Services Attractiveness Survey 2016
PWC Report on Leaving the EU: Implications for the UK Financial Services Sector 2016
Click on the icon below for calculation of various indices

Microsoft Excel
Worksheet
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