The monetary providers trade is likely one of the UK’s financial powerhouses, producing important worth and using extremely expert employees. However measuring productiveness inside the sector is difficult, making it exhausting to design efficient insurance policies that maximise the potential of this important a part of the economic system.
Within the years main as much as the 2007/08 World Monetary Disaster, productiveness progress within the UK monetary sector was the very best amongst G7 economies, surpassed solely by Spain. Multifactor productiveness (MFP) within the sector grew by round 40% between 1990 and 2007, fuelled by deregulation, monetary innovation, and London’s sustained rise as a world hub for monetary providers.
The disaster marked a turning level. From 2007 to 2014, monetary providers MFP fell by 20%. This occurred at the same time as different UK industries managed to extend their productiveness over the identical interval. By way of productiveness progress, measured as gross worth added (GVA) per hour labored, the UK monetary sector has been the slowest within the G7 for the reason that disaster, behind solely Italy over the previous ten years (Determine 1).
Determine 1: Monetary sector GVA per hour labored
Supply: Authors’ elaboration utilizing OECD information.
Word: Index 2025 = 100. This information is listed, so it have to be learn as relative values (evolutions) quite than absolute values.
Regardless of this current downturn, the monetary sector continues to be a powerful driver of financial progress within the UK economic system. In 2024, monetary providers contributed over £200 billion in GVA – 8.6% of the whole, and one of many highest shares amongst superior economies. Solely america has a monetary sector of comparable weight relative to GDP (Determine 2). The truth is, output per employee within the UK monetary providers sector is greater than double that of producing and practically 3 times larger than the economic system as a complete.
Determine 2: Measurement of the monetary sector GVA within the UK and peer international locations
Supply: Authors’ elaboration utilizing OECD information.
regional GVA, monetary sector positive aspects are distributed extremely inconsistently throughout the UK. London alone generates half of the UK monetary sector’s ‘worth added’, adopted by the South East, which contributes lower than 10%. The Metropolis of London and Canary Wharf are international centres for banking and insurance coverage, however this regional imbalance leaves different elements of the nation disconnected from the sector’s financial positive aspects.
By way of the normal measure of output, the monetary sector stays among the many best within the UK. But when we have a look at productiveness progress, progress has been stagnant for the reason that monetary disaster. The normal ‘output method’ is calculated as the worth of the trade’s gross outputs minus the worth of the intermediate inputs used within the manufacturing course of. This creates issues when measuring productiveness in providers. For instance, intermediate providers, reminiscent of authorized recommendation and IT assist, don’t rely in the direction of the monetary sector’s GVA. This causes complications when making an attempt to know the productiveness of the sector.
Different measurement challenges within the monetary sector
Measuring productiveness in finance is notoriously complicated. Not like manufacturing, the place outputs may be counted in bodily models, monetary providers output is usually captured not directly by way of measures reminiscent of ‘Monetary Intermediation Companies Not directly Measured’ (FISIM) or survey-based estimates of employment and pay. These strategies are imperfect and typically deceptive. This could result in misjudgement in each the sector’s contribution to progress and its systemic dangers.
Conventional productiveness metrics reminiscent of GVA, FISIM, and measures derived from the Labour Drive Survey (LFS) have well-documented limitations and infrequently fail to seize the total scope of monetary actions. A few of these weaknesses embrace:
- GVA: output is estimated in another way throughout sub-sectors, counting on charges, commissions, premiums or employment numbers. In supplementary (or ‘auxiliary’) providers reminiscent of asset administration, utilizing employment information as a proxy for output can underestimate true productiveness.
- FISIM: calculated utilizing rate of interest margins, this measure may be skewed relying on whether or not a risk-free or risk-inclusive reference price (i.e., benchmark price) is chosen. Together with threat premia can overstate output by treating risk-taking itself as productive.
- LFS: declining response charges and lack of trade stratification make this survey more and more unreliable for sector-specific estimates.
Metrics reminiscent of GVA and FISIM are strictly outlined inside worldwide frameworks, which means changes should align with established methodologies. Whereas these tips guarantee consistency and comparability throughout international locations and industries, additionally they current inherent limitations in capturing the total breadth of monetary sector productiveness.
These challenges spotlight the necessity for complementary indicators that higher mirror how finance creates worth. Researchers and policy-makers interviewed for this research by LSE economists emphasised that productiveness in finance is just not at all times properly captured by output-to-input ratios and should require sector-specific measures.
In direction of higher measurements
The challenges talked about above spotlight the necessity for the development of proxy or various indicators to evaluate the productiveness of monetary providers. Some steps to deal with this might embrace:
- Introduce proxy indicators by sub-sector: regulators might complement conventional metrics with output-related ratios. For banks, this would possibly imply new loans or deposits per worker. For insurers, gross sales commissions per worker may very well be tracked. Sector-wide, income per worker gives an easy benchmark for productiveness. These indicators are simple to interpret and align with how folks within the trade already monitor efficiency.
- Revise measurement for the auxiliary monetary providers sub-sector: given the restrictions of employment-based proxies, various metrics might embrace asset administration charges or service fees. These are extra instantly tied to output and would higher seize the worth generated by asset managers and different auxiliary suppliers, which account for about 15% of monetary sector output.
- Observe regulatory impacts: as an alternative of trying solely at output, regulators would possibly measure how guidelines have an effect on effectivity. Indicators such because the time required to convey a brand new product to market or file an preliminary public providing (IPO) prospectus might reveal how regulation shapes productiveness. This may assist policy-makers strike the best steadiness between stability and competitiveness.
Trying forward, new applied sciences may very well be each a problem and a possibility for measuring productiveness inside the monetary providers sector. Synthetic intelligence, blockchain know-how, and digital finance are reshaping enterprise fashions, however their affect is just not but absolutely mirrored in productiveness statistics. If harnessed successfully, these improvements might ramp up effectivity and competitiveness. However once more, questions stay about tips on how to then measure this precisely.
Bettering the productiveness of the UK’s monetary providers sector would require a forward-looking framework that mixes higher measurement, smarter regulation, and assist for innovation. By refining how productiveness is assessed, making certain guidelines promote each stability and effectivity, and by harnessing new applied sciences, the UK can reinforce the monetary sector’s position as a driver of progress and stability whereas remaining aggressive in an evolving international panorama.
