Structure of the financial services industry

Although the global financial crisis which began in 2007 wrought havoc with the UK financial services industry, the sector has continued to be dominated by banks. This domination had been reinforced by the conversion of most of the large building societies to banks in the 1980s and 1990s – although all those that did convert were subsequently either acquired by other banks or, in the case of Northern Rock Bank and parts of Bradford & Bingley Bank, taken into public ownership during the financial crisis. Banks and other types of lending institutions are described in Box 2. In 2010, banks accounted for 59 per cent of personal lending, building societies accounted for 13 per cent, and other specialist lenders accounted for 28 per cent (Bank of England, 2010a). The UK Lending Industry- Banks are mostly public limited companies (plcs) that are owned by their shareholders. These include the major ‘high-street’ names, such as Barclays, Lloyds Banking Group, HSBC, the Royal Bank of Scotland (RBS) and Banco Santander – the Spanish bank that has made a number of acquisitions of UK banks including Abbey National Bank and Alliance & Leicester Bank. Additionally, there are a number of smaller banks including Metro Bank, which commenced business in 2010, and Church House Trust Bank, which is owned by Virgin Money. The UK Government currently has majority shareholdings in RBS and Lloyds Banking Group as a result of the support that both needed at the height of the global financial crisis. Building societies are ‘mutual’ organisations. This means that they are owned by their retail savers and borrowers (that is, their personal customers). When they were originally founded – mostly in the nineteenth century – building societies were organisations formed by groups of people who saved together to buy land on which to build their homes. Subsequently, ‘permanent’ building societies emerged with whom people could save even if they did not need to acquire a home themselves. The Nationwide Building Society is, by some distance, the largest of the remaining societies in the UK, although in 2010 there were still forty-nine others, such as the Yorkshire, the Coventry and the Skipton Building Societies. Finance companies are in many cases subsidiaries of banks and building societies. These specialise in personal loans, and motor and retail finance (e.g. Carselect – a subsidiary of Lloyds Banking Group). Direct lenders are also often subsidiaries of banks, building societies and insurance companies. The chief distinction between these and other lenders is that they do not have a branch network; they deal with customers via the internet, telephone and the post, e.g. Direct Line. Credit unions are cooperative organisations, often small in size and run on a localised basis. There are two main types: community-based, whose members tend to come from low-income groups; and work-based, whose members are employed with an affiliated organisation. One of the largest is The Open University’s credit union. The Student Loans Company (SLC) is owned by the UK Government, and lends to students in higher education to enable them to meet their expenses. With the cost of higher education increasing in recent years, the SLC has become a major lender. The alternative credit market consists of ‘sub-prime lenders’ aimed primarily at people on low incomes. Such lenders include some loans companies, door-to-door money lenders, rental purchase shops, ‘sell and buy back’ outlets, and pawnbrokers. In addition, this market includes unlicensed lenders who provide loans in an emergency at extremely high rates of interest. Budgeting loans are available for people on some state benefits. These are interest-free loans which have to be paid back, and in 2010 they had a borrowing limit of £1500. The UK’s lending industry has been affected by the diversification into financial services of many retailing companies, particularly the supermarkets. Initially, these moves into financial services were undertaken as joint ventures with established banks. For example, the financial services activities of Tesco were originally a fifty-fifty joint venture with First Active – part of the Royal Bank of Scotland (RBS). In 2008, however, Tesco bought out the RBS share and established its finance operations on its own as Tesco Bank