The finance industry is vital to the well-being of the UK’s economy and it is integral to our lives. The UK’s financial institutions keep almost £850 billion of our deposits safe primarily in high street banks. They have issued more than 164 million credit and debit cards, which facilitate an effective payment system for issuers, merchants and consumers. They pool risk by managing the savings and pensions of three quarters of UK households, and with £449bn of business loans outstanding, they move money from where it is, to where it is needed, through effective intermediation.

Yet ten years on from the collapse of Lehman Brothers, with the dominant narratives about financial services centred on bank bailouts and giant bonuses, it is all too easy to fall back on the assumptions that the industry is too dominant in the UK and represents poor value for money. Given the supreme importance of financial services to our economy and the urgency of Brexit, this is dangerously complacent.

At Pension Insurance Corporation, the company I run, we believe fundamentally in the good that financial services achieve. As a country we rely on the financial sector to fund the building of our infrastructure, to help develop social housing and renewable energy, to nurture growing companies, and, as with the purpose of my company, to pay the guaranteed pensions of our 160,000 policyholders. But the argument for financial services seems to be a losing one.  That is why in the third paper in our “Purpose of Finance” series we are publishing ground-breaking work by Dr Guillaume Bazot.  Dr Bazot’s research sets out for the first time the cost of finance to the end user in the UK, and compares it to that of France, Germany and the US.

It is somewhat staggering that, until now, no one has yet determined just how cost efficient for consumers and customers the UK’s financial services sector is. The good news is that the UK has a significant competitive advantage.  Or at least that is the case for the time being, as the French are becoming more competitive.

Dr Bazot compares the cost of the finance industry over time relative to the amount of money it has intermediated, that is received from savers and then lent out to businesses and borrowers. He divides the profits and employee costs, including bonuses, provided by financial services firms to the amount of money which the industry has intermediated. This measure should be a vital starting point for policymakers, regulators and others interested in the City as a foundation of the economy, because even small improvements in cost efficiency can have significant benefits for the real economy.

The context for Dr Bazot’s findings, as described in his paper, is that financial services as an industry has grown hugely over the 70 years covered by his study, and in 2014 it represented more than 8% of GDP. This is not surprising given the massive increase in savings and investments we have seen over that period. We are all much heavier users of financial services than our grandparents, simply because the country has got richer.

What is perhaps most surprising about Dr Bazot’s findings is that the UK has consistently had the most cost effective financial services sector over that 70 year period, even when compared to the US, which one might assume to have an overall advantage. What Dr Bazot has shown is that the cost to the end user of the UK’s financial services sector has remained fairly static, albeit with significant increases in costs prior to Big Bang, the reform of the City in 1986, followed by significant falls. In short, the cost of intermediation today is similar to the cost 70 years ago, reflecting a similar position in the US.

However, the UK’s leadership position is potentially at risk. France saw a dramatic decrease in the cost of financial services following a period of deregulation from the 1950s onward.  On current trends, France will, over time, have a more cost efficient financial services sector than the UK.

With Brexit looming, it is incumbent on politicians, regulators and the industry itself to actively, and urgently, engage in a policy debate about the right level of intermediation costs. This includes a wider debate about the factors acting to shape this number, including the respective roles of technology, innovation, competition, market short-termism, and consumer protections, amongst others. To my mind, a vital part of this debate is how best to get financial services companies to focus on their purpose, and then be regulated to that purpose. This should naturally lead to a more cost efficient financial services industry, ultimately benefiting the consumer and by extension the wider economy.

Economic history strongly suggests that a more cost efficient financial services sector will reinvigorate the UK’s economy and perhaps generate vital growth in the UK’s most deprived regions. Given the UK’s changing place in the world, this debate is today needed more urgently than ever.

Tracy Blackwell is CEO of Pension Insurance Corporation

Dr Bazot’s research will be published on 7 November, and will be available at