SOAS University of London

Research shows fall in diversity of UK financial services

11 April 2013

A study carried out on behalf of the Building Societies Association by academics at the Oxford University and SOAS, University of London shows a fall in the diversity of the financial services sector. 

Such a decline is potentially both damaging the resilience of the financial system and reducing effective competition for consumers. 

The Diversity Index (D-Index) was developed by Jonathan Michie, Professor of Innovation & Knowledge Exchange, University of Oxford and Christine Oughton, Professor of Management Economics, SOAS, University of London.  The index, which is used to measure diversity in both the savings and mortgage markets since 2000 is based on four sub-indicators:

  • Size of firms – is the market balanced or dominated by a few large players?
  • Location of firms – are firms concentrated or spread across the UK?
  • Approach to funding – extent of reliance on wholesale versus retail funding?  
  • Corporate ownership structures – plc/mutual/state?

The overall conclusion is that by all of these measures diversity, across both the savings and mortgage markets, has dropped by about 20 per cent since 2004.  This decline started well before the financial crisis hit.  Between 2004 and 2009 there was a general shift towards a market concentration of larger, wholesale-funded, London-centric plc banks.  Taking as the benchmark a diversity index of 100 in 2000, by 2011 the index stood at 82 in the mortgage market and 85 in the savings sector.  

Commenting, Jonathan Michie, Professor of Innovation & Knowledge Exchange at the University of Oxford, and an author of the report said:  “Growing and maintaining diversity within the financial services industry is not just a matter of academic interest.  It is crucial for two reasons.  Firstly it reduces the risk of future market shocks infecting the whole financial system, as difference promotes resilience.  Secondly a diverse market increases the effectiveness of competition on behalf of consumers.  By both measures the shape of the UK financial services sector has become less healthy since 2004.  Although the slide in diversity seems to have been arrested, there is little sign of any meaningful improvement.  All the evidence points to the existence of a serious concentration risk which is bad for consumers and market stability.”

Jonathan Evans MP, Chair of the All-Party Parliamentary Group on Building Societies & Financial Mutuals, said:  "The Diversity Index was a recommendation from the 2011 Report from the All-Party Parliamentary Group on Building Societies & Financial Mutuals Fostering diversity: promoting mutuals. Many Parliamentarians from all political parties recognise the importance of a diverse financial services sector for consumer choice and for the health and resilience of the economy as a whole. The Group welcomes the publication of the Diversity Index and we will continue to monitor Government policies and how they affect the health of mutuality in the UK."

Adrian Coles, Director-General of the BSA said:  “The 2010 Coalition pledge to ‘foster diversity in financial services’ is clearly still a work in progress and action by the Government is still needed.  This is not only to promote and facilitate the arrival of new entrants, but to provide the right environment for the growth of existing challengers to the big plc banks such as building societies and other mutuals.  Now is the time for the Government’s stated intent to be brought to life, as MPs consider the content of the Banking Reform Bill.  Care will be needed to ensure that Government policies don’t unintentionally distort competition.”  

The Building Society Association has published a summary of the research on its website.

The full research paper, including methodology and results, “Measuring Diversity in Financial Services Markets: A Diversity Index”, Michie J and Oughton C, is published on the web-pages of SOAS' Centre for Financial and Management Studies.