Modern societies need a well-functioning financial sector that meets the needs of households and businesses in the ‘real economy’. The UK’s financial sector is huge and sophisticated and makes a major contribution to the UK economy both in terms of its direct contribution to GDP and services provided to the real economy. It is no wonder that the future of the City has featured so prominently in the debate about the UK economy post-Brexit.
The City’s influential lobbyists are effective at promoting the benefits – so much so that policymakers are reluctant to introduce serious reforms that would radically change the scale and structure of the city for fear of ‘killing the golden goose’. But to get a more balanced picture of the true value of the City, we must consider the economic and social costs. This same dependency on the City means the UK economy is very vulnerable to risky behaviours and market failure in the huge wholesale and institutional financial markets.
The costs of failure in retail financial services (such as misselling scandals or weak competition in banking) have been well-documented. There have also been a few attempts to estimate the costs associated with the financial crisis. But, there have been surprisingly few attempts to pull together the available evidence on the full range of costs associated with financial market activities and how well the City performs its primary functions from the perspective of the end user. This is not just of academic interest. Consumer organisations are effective at holding retail financial services providers to account. But the lack of evidence and focus means that the larger, more powerful wholesale and institutional markets and infrastructure providers receive little scrutiny from civil society. This hinders necessary reform.
With this in mind, the TUC asked The Financial Inclusion Centre to produce a report to:
Map the main functions of the UK financial sector (the City) grouped around its primary activities, markets, institutions and products.
This report attempts to pull together the available research on the benefits and costs to the economy and society. Of course, it is not possible to arrive at a discrete number which quantifies the net worth of the City along the lines of: the City contributes £X bn to the UK’s GDP; but the total welfare loss/ value extracted is equal to £Y bn; therefore the net worth of the City is equal to £Z bn. Nevertheless, pulling together these costs in one place allows us to put in context the claims about the value created by the City to provide a more realistic assessment of its worth to the wider economy and society.
Download full report below.