UK Finance Industry Report

Q2 2023
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United
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Banking & Financial Servic
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Includes 10-year forecasts to 2032
United Kingdom Banking & Financial Services Report | Q2 2023
Contents
Key View............................................................................................................................................................................................ 5
Banking Industry Risk Analysis ................................................................................................................................................ 8
Banking Industry Risk Analysis ..............................................................................................................................................11
SWOT ................................................................................................................................................................................................13
Banking & Financial Services SWOT ....................................................................................................................................................................................13
Banking ...........................................................................................................................................................................................14
Banking Snapshot ......................................................................................................................................................................................................................14
Mortgage Lending Slowdown To Weigh On UK Loan Growth In 2023..................................................................................................................16
Forecast Tables ............................................................................................................................................................................................................................22
Competitive Landscape ..........................................................................................................................................................................................................24
Regulatory Environment .........................................................................................................................................................................................................30
Insurance........................................................................................................................................................................................33
Insurance Snapshot...................................................................................................................................................................................................................33
Asset Management .....................................................................................................................................................................42

Asset Management Snapshot ...............................................................................................................................................................................................42
Stock Exchanges..........................................................................................................................................................................48
Stock Exchanges Snapshot ....................................................................................................................................................................................................48
Macroeconomic Overview ........................................................................................................................................................55

Subdued Outlook For The UK Economy, But Scope For Some Near-Term Positive Surprises....................................................................55
Macroeconomic Forecasts .....................................................................................................................................................................................................59
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Household Income Forecasts................................................................................................................................................................................................61
United Kingdom Demographic Outlook...............................................................................................................................62
Banking & Financial Services Methodology........................................................................................................................65
Banking Industry Risk Indicator Methodology ..................................................................................................................66
Key View
Key View: The UK's banking and financial services sector is one of the most developed and competitive markets in the world.
Growth prospects continued to improve throughout 2022 across the banking, insurance and investment sectors. We expect this to
continue into 2023, albeit at slower rates than previously forecast owing to geopolitical tensions and high commodity prices.
The UK banking sector experienced a strong post-pandemic rebound in 2021 and 2022, with estimated loan growth of 2.9% and
3.5% y-o-y respectively. However, we expect growth to moderate in 2023 on account of the Bank of England’s aggressive tightening
of monetary policy, with interest rates set to reach 4.00% in the coming quarters, remaining high until at least H124. We expect that
consumer credit growth will continue to expand in Q123, which will offset weaker mortgage lending. However, downside risks to
this view have risen owing to an increasingly challenging macroeconomic backdrop. In particular, an inflation-induced loss of
household purchasing power and weakening consumer sentiment could weigh on short-term growth in 2023.
The UK's insurance industry is among the largest and most diverse globally, with several hundred providers active in the life and
non-life sectors, the vast majority of which are highly capitalised. The market is composed of a broad range of mandatory lines in
both sectors as well as numerous additional covers and services. Life insurance cover in particular is well established, although the
current high rates of cover in this sector limit future growth potential from existing product lines. There are also headwinds to
development in the short term from inflation and economic uncertainty. However, there are gaps in coverage that could be
exploited by product diversification and direct digital sales. Insurance providers will also benefit from a high level of consumer
awareness, as well as the industry's extensive (and still growing) product ranges and distribution channels.
The UK is a global leader in asset management, second only to the US in terms of the total size of the industry. The sector boasts a
broad range of competing providers, from the world’s largest fund managers to smaller local asset management companies, and
remains extremely competitive despite significant consolidation over recent years. Banks and insurance companies are also active
in the market, although many banks reduced their exposure in the aftermath of the global financial crisis. Economic uncertainty,
high inflation and aggressive central bank monetary tightening will pose headwinds to the sector throughout Q123.
The UK is home to one of the world's largest stock exchanges, the London Stock Exchange (LSE), as well as several smaller markets
that ensure high levels of market liquidity and access to capital. The LSE is one of the oldest markets in existence, with extensive and
diverse product offerings from some of the most valuable companies in the UK and around the world. London also remains one of
the major global locations for the trading of bonds, currencies and derivatives, and will continue to hold a region-leading position in
the market, despite challenges from markets such as Paris and Amsterdam. In the short term, the LSE remains exposed to global
financial market volatility as domestic and international investor confidence remains uncertain following the Russian invasion of
Ukraine.
Loan Growth To Slow In 2023 But Will Rebound Thereafter

United Kingdom - Client Loan Growth, % y-o-y (2021–2027)
e/f=Fitch Solutions estimate/forecast. Source: Bank of England (BoE), Fitch Solutions
Latest Trends And Developments
• In December 2022, the BoE increased the base rate from 3.00% to 3.50%, bringing interest rates to their highest level since the
largest rate hike since late 2008. This continues a tightening cycle that commenced in December 2021 when the BoE raised the
base rate from 0.10% to 0.25%. Rising global commodities prices pushed CPI inflation up to 10.5% in December 2022, well
above the BoE's 2.0% target, although down slightly from October’s peak of 11.1%.
• We expect insurance sector growth to continue in 2023. In the life insurance sub-sector, which accounts for around three-
quarters of total underwriting activity in the market, we forecast gross premiums growth of 6.6% in 2023, down from an
estimated 10.4% in 2022, to reach a total of GBP224.8bn. Gross premiums will then grow by an average of 4.6% a year over the
remainder of the medium-term forecast period to 2027. In the non-life sector, we expect growth of 2.7% in 2023, down from
4.6% in 2022, which will bring premiums to a total of GBP71.9bn. Slower growth averaging 2.4% a year is expected over the
medium term to 2027, driven primarily by the leading property, general liability and motor insurance segments.
• Data released by the Investment Association show that funds under management increased by 2.7% m-o-m in November 2022
(latest available data), but they were down by 11.0% y-o-y. The m-o-m increase was sharpest for ISAs, where funds under
management increased by 4.6% m-o-m, while money markets funds under management saw a decrease of 10.9% m-o-m.
UNITED KINGDOM - FINANCIAL SERVICES FORECASTS (2021–2026)

Indicator 2021e 2022e 2023f 2024f 2025f 2026f
Finance nominal GVA, USDbn 241.40 239.64 244.61 267.03 285.38 297.90
Finance USD nominal growth, % y-o-y 12.1 -0.7 2.1 9.2 6.9 4.4
Finance nominal GVA, GBPbn 175.51 194.42 203.84 211.93 222.95 232.73
Finance GBP nominal GVA growth, % y-o-y 4.5 10.8 4.8 4.0 5.2 4.4
Finance nominal GVA, % total GVA 8.62 8.59 8.71 8.82 8.93 9.03
e/f=Fitch Solutions estimate/forecast. Source: Office for National Statistics (ONS), Fitch Solutions
UNITED KINGDOM - FINANCIAL SERVICES FORECASTS (2027–2032)

Indicator 2027f 2028f 2029f 2030f 2031f 2032f
Finance nominal GVA, USDbn 310.62 323.55 336.69 349.83 362.81 375.93
Finance USD nominal growth, % y-o-y 4.3 4.2 4.1 3.9 3.7 3.6
Finance nominal GVA, GBPbn 242.67 252.77 263.04 273.30 283.45 293.69
Finance GBP nominal GVA growth, % y-o-y 4.3 4.2 4.1 3.9 3.7 3.6
Finance nominal GVA, % total GVA 9.12 9.20 9.27 9.33 9.39 9.45
f=Fitch Solutions forecast. Source: ONS, Fitch Solutions
Banking Industry Risk Analysis

Banking Industry Risk Indicator
Note: Scores out of 100; higher scores imply lower risk. Source: Fitch Solutions
Key View: The UK's Banking Industry Risk Indicator (BIRI) score of 71.25 (out of 100) in Q422 reflects relatively low levels of
banking sector risk and benign fundamentals. We rank each market out of 122, where first is lowest risk and 122nd is highest risk.
The UK is in 31st position.
BIRI Overview: The UK’s banking sector does not currently pose a threat to the market's macrofinancial stability. Despite rising
headwinds from high inflation, tighter monetary policy and the fallout from the Russia-Ukraine war, the UK economy grew by an
estimated 4.2% in 2022, with positive knock-on effects for the sector’s fundamentals and risk outlook. The market's overall BIRI
score rose to 71.25 in Q422, up from 69.85 in Q322, implying lower risk. This was largely driven by a rise in the Financial component
score, owing to a fall in Bank Credit To GDP from 136.0% in Q322 to 134.4% in Q422, according to our estimate.
Banking Sector Risk Remains Elevated Compared With Pre-Pandemic Levels

United Kingdom – BIRI Scores & Historical BIRI Average
Financial: The Financial component score rose to a seven-year high of 72.26 in Q422, rising from 68.44 in Q322, implying lower
risk. This reflected both a modest rise in Liquid Assets To Short-Term Liabilities to an estimated 43.4% in Q422 from 42.9% in Q222,
and a small decrease in Bank Credit To GDP from 136.0% in Q322 to an estimated 134.4% in Q422. Key measures of financial
stability indicate that UK banks are fully compliant with Basel III liquidity requirements and capital ratios, which suggests that
banking sector risk does not currently pose a significant threat to the market's macrofinancial stability, as banks have sufficiently
strong balance sheets to withstand an economic shock such as the one caused by government restrictions in response to
Covid-19. At 20.9% as of Q422, the UK’s Regulatory Capital to Risk-Weighted Assets sits above the developed markets average of
19.8%.
Financial Component Continues To Improve

United Kingdom – BIRI Component Scores
Government Finance: The Government Finance score rose from 39.35 in Q322 to 40.74 in Q422, implying lower risk. In
particular, the unwinding of unprecedented deficit spending following the onset of the pandemic has resulted in the Government
Finance component steadily increasing from a recent low of 23.32 in Q420. The key factor behind the rise in the score was an
improved Government Balance (% of GDP), which went from -12.5% in Q420 to -6.0% in Q422, according to our estimate. UK debt
metrics are likely to rise only slowly over the coming years, given the unprecedented scale of government support for the economic
recovery. Government debt (% of GDP) rose from 84.5% in Q120 to 109.1% in Q422. This elevated debt burden will constrain the
government’s ability to extend similar stimulus and macroeconomic support come the next downturn.
Regulatory Quality & Environment: The UK's score for this component is 85.44 in Q422, which compares favourably with other
markets. The UK's operating environment is highly conducive to doing business, owing to the strong rule of law, a stable political
environment and the traditionally business-friendly attitudes of successive governments.
Living Standard: The Living Standard component score is 88.17 in Q422. With GDP At PPP, USD Per Capita at USD53,083.1 in
Q422, the UK ranks poorly relative to some of its advanced peers, and lower than Luxembourg, Norway and Ireland, each of which
have component scores of 100.00 in Q422. However, it scores better than Italy and Spain.
International Linkages: The UK scores 46.42 in the International Linkages component in Q422, falling slightly from 47.14 in
Q322, implying slightly higher risk. Gross External Debt (% of GDP) has fallen markedly over the course of the past decade, from
352.9% of GDP in Q411 to 293.9% in Q422, implying lower risk. However, the positive impact on the International Linkages score
has been offset by a widening deficit in the Current Account Balance (% of GDP), from -2.0% in Q411 to -5.2% in Q422, as the UK
continues to spend more than it saves. It was this metric that worsened between Q322 and Q422, with the Current Account
Balance (% of GDP) widening from -4.3% in Q322. This imbalance leaves the UK somewhat vulnerable to capital flight, which can
lead to sharp swings in the pound sterling during periods of global market stress, as seen at the start of the Covid-19 pandemic in
March 2020.
Economic Volatility: The Economic Volatility component score fell slightly from 38.60 in Q322 to 36.09 in Q422, implying higher
risk. Volatility has picked up markedly since the onset of the pandemic in 2020 (which broke a nearly two-year streak of 100.00
scores in this component), and more recently following the conflict-induced rise in inflation, which saw the score fall from 50.24 in
Q321 to its present low. CPI Volatility (24 quarters rolling standard deviation of pct change) rose from 0.4 in Q321 to 1.0 in Q422 as
inflation set in, while GDP Volatility (24 quarters rolling standard deviation of pct change) remains elevated at 1.5, compared with 0.1
in Q419, both of which imply higher risk. We expect that the Economic Volatility component score will increase somewhat in the
coming years as economic conditions normalise and inflationary pressures abate.
Banking Industry Risk Analysis

DEVELOPED MARKETS BANKING INDUSTRY RISK INDICATOR SCORES
Regulatory
Government Living International
Financial Quality & Volatility
BIRI Finance Standard Linkages
Component Environment Component
Component Component Component
Component
Denmark 100.00 100.00 77.09 96.89 93.70 73.02 58.55
Norway 100.00 81.90 100.00 92.25 100.00 100.00 70.94
Switzerland 100.00 87.65 70.74 98.05 97.03 72.95 67.76
Singapore 95.13 71.38 65.74 100.00 100.00 75.33 50.66
Ireland 94.47 77.18 71.65 87.71 100.00 74.68 51.66
Luxembourg 94.39 70.33 71.13 93.49 100.00 71.18 58.75
Germany 87.88 80.54 63.07 84.85 91.39 58.59 56.08
United States 86.61 82.04 55.51 86.51 95.62 46.92 54.81
Netherlands 86.39 64.51 66.07 94.44 93.67 72.81 48.06
Sweden 86.34 65.45 73.93 92.15 92.64 60.76 54.82
Hong Kong, China 84.59 72.66 58.99 91.37 93.05 62.80 44.94
Canada 83.99 67.05 66.85 90.45 89.85 63.57 52.39
Australia 82.09 57.62 63.72 89.62 92.86 65.51 60.15
Austria 80.83 69.39 62.12 86.25 92.18 59.71 45.01
Finland 79.89 50.54 65.08 95.94 90.58 56.76 64.52
Cyprus 77.51 82.41 78.65 66.29 87.01 52.60 37.91
Estonia 75.56 71.83 68.85 81.58 85.67 56.59 33.18
South Korea 73.48 57.59 59.07 80.83 87.38 41.40 70.58
Japan 72.24 56.54 45.99 85.03 85.19 48.97 68.70
United Kingdom 71.25 72.26 40.74 85.44 88.17 46.42 36.09
Belgium 70.85 53.65 59.31 80.78 91.67 57.89 47.12
Iceland 69.82 55.38 52.12 87.03 92.37 45.50 45.02
Czech Republic 68.60 67.46 54.80 77.58 86.61 44.14 39.39
Portugal 68.26 63.45 73.48 71.33 83.25 57.59 34.18
Malta 67.89 74.79 49.84 69.01 88.69 46.72 34.45
France 67.89 52.92 54.31 80.10 88.75 54.73 48.54
Israel 67.03 41.00 73.59 78.66 86.79 52.08 59.50
Italy 66.84 73.37 49.65 60.66 87.37 54.87 41.07
Slovenia 66.73 51.57 68.79 71.61 87.12 66.95 40.18
Greece 62.17 73.96 76.10 55.10 80.92 43.31 27.61
Spain 61.45 53.30 58.32 73.34 85.27 57.49 31.82
New Zealand 59.55 30.63 49.91 88.89 86.55 38.07 64.00
Regulatory
Government Living International
Financial Quality & Volatility
BIRI Finance Standard Linkages
Component Environment Component
Component Component Component
Component
Slovakia 58.49 55.51 55.80 61.87 80.55 47.62 50.46
Slovakia 55.98 53.30 53.11 62.80 80.28 44.67 48.01
Note: May include territories, special administrative regions, provinces and autonomous regions. Scores out of 100; higher score = lower risk. Source: Fitch Solutions
SWOT
Banking & Financial Services SWOT
Strengths Weaknesses
• London has a long-established status as a global financial • Sovereign support capacity for the banking sector is
centre, underpinned by strong institutions, effective regulation, considerably lower than in the pre-financial crisis period.
deep and liquid capital markets for government and corporate • Both the life and the non-life insurance segments are mature,
debt, and a business-friendly operating environment. and some lines in the non-life sector are struggling to find
• The banking sector benefits from strong asset quality, adequate avenues for growth.
capital buffers and a competitive business and tax environment. • Strongly entrenched competition between the existing players
• One of the largest insurance markets globally, insurers in the in the banking and insurance markets limits the scope for new
UK benefit from significant expertise and established practices. entrants.
• The UK is a regional leader in asset management, and second • Key UK financial service exports, which account for roughly 20%
only to the US on a global comparison. of total exports, remain depressed by the impact of Brexit,
• The London Stock Exchange offers diverse listings and is one of which has seen firms shift some activity from London to the
the largest platforms globally in terms of market capitalisation. continent following the loss of passporting rights. This could
cause a long-term decline in the financial services industry.
Opportunities Threats
• Saturation of the insurance market favours companies able to • On some metrics, London has recently been overtaken by
innovate and identify emerging market trends, such as health European markets such as Paris and Amsterdam as Europe’s
insurance schemes exploiting rising incomes and uncertainty largest stock market.
over the publicly funded National Health Service. • Loan growth is still largely being driven by households, which
• The proposed Edinburgh Reforms could allow the UK to gain a are already relatively highly leveraged.
competitive edge relative to the EU by relaxing certain • Consumer confidence in insurance sector could be
elements of the financial services regulatory architecture. undermined by the dispute surrounding Covid-19 coverage
• Challenger banks such as Monzo and Revolut have the potential under business interruption policies, resulting in legal action
to disrupt the market. from the regulator.
• Exposure to further domestic and global disruption as well as
potential future austerity measures owing to record levels of
public debt.
• High levels of household indebtedness mean that asset quality
may suffer in a rising interest rate or slowing growth
environment.
Banking
Banking Snapshot
Key View: The UK's well-developed banking sector will continue to grow, albeit at a slowing rate, throughout our 10-year forecast
period. We expect that consumer credit growth will continue to expand in Q123, with increased consumer borrowing offsetting
weaker mortgage lending; however, downside risks to this view have risen owing to an increasingly challenging macroeconomic
backdrop. In particular, an inflation-induced loss of household purchasing power and weakening consumer sentiment could weigh
on short-term growth in 2023.
Asset Growth Stalling

United Kingdom - Total Banking Assets (2021–2032)
e/f = Fitch Solutions estimate/forecast. Source: Bank of England (BoE), Fitch Solutions
• In January 2023, the FT reported that the Bank of England had written to the chief executives of banks to deliver a rebuke
concerning their risk-management systems. The market reaction to Russia’s invasion of Ukraine, volatility in the nickel and long-
dated gilt markets, and the collapse of FTX had all exposed banks’ risk management blind spots, according to the letters, with
firms continuing to accrue large and concentrated exposures to single counterparties such as hedge funds, pensions and other
non-banking financial institutions.
• In December 2022, the Guardian reported that a quarter of UK consumers were now more likely to visit bank branches in person
amid struggles with surging energy, food and housing costs, according to research by KPMG. Nearly half of bank branches have
closed since 2015, as banks lenders have cut costs and moved their customers onto online banking platforms, but the cost-of-
living crisis has seen a resurgence in customers returning to physical branches, often to seek financial advice from their bank. In
January 2023, the Express reported that industry analysts overwhelmingly believed that in-person banking would be a thing of
the past by 2027.
• Although mortgage lending growth slowed in H222, it was offset by a rebound in consumer credit growth, bringing total client
loan growth to an estimated 3.5% in 2022. We expect client loan growth of 3.0% in 2023, compared with a pre-pandemic five-
year average of 3.3%.
• Further tightening of monetary policy by the Bank of England will increase borrowing costs, which will support bank profitability
in the short term.
• In December 2022, the FT reported that UK banks were scaling back their lending to North Sea oil and gas producers following
the government’s imposition of a windfall tax on fossil fuel companies in November. Small- and medium-sized oil and gas
producers in the UK currently rely on around GBP14bn of borrowing under so-called reserves-based lending facilities, which are
linked to the value of their oil and gas reserves. Banks have been reassessing the amount of credit they are prepared to offer
North Sea producers since the 35.0% tax on energy profits was extended to 2028.
• In December 2022, interest rates on new average two- and five-year fixed-rate mortgages fell below 6.0% for the first time in two
months. Mortgage costs surged in the wake of the Truss government’s mini-Budget in September 2022, peaking at 6.65%, but
the average two-year deal had reached a rate of 5.99% by December 5 2022, while the average five-year deal had reached
5.78%, according to the BBC.
• In December 2022, the FT reported that the number of mortgages in arrears was estimated to have reached 80,100 in 2022.
According to the banking industry body, UK Finance, that number will rise to 98,500 in 2023, as higher interest rates create
challenges for homeowners whose fixed-rate mortgage deals have come to an end. In June 2022, mortgage arrears reached the
highest level in 12 years, with over GBP2.0bn in loans classified as delinquent.
• In December 2022, the Chancellor Jeremy Hunt announced the first major package of reforms to the UK’s banking regulatory
rulebook. The so-called Edinburgh Reforms include changes to the ring-fencing regime, a review of the Senior Managers Regime
and reform of the EU’s Solvency II rules on insurance companies’ investment activities.
• In December 2022, the government’s Financial Services and Markets Bill passed its third reading in the House of Commons. The
government claims that the bill will allow the UK financial sector to take advantage of increased post-Brexit control over the
financial services regulatory architecture, thus allowing implementation of the outcome of the Future Regulatory Framework
Review. The bill is now under scrutiny by the House of Lords select committees.
• In November 2022, the Prudential Regulation Authority opened a consultation on proposed new rules that would bring the UK
into alignment with the parts of the Basel III standards that remain to be implemented. The so-called ‘Basel 3.1’ standards would
see significant changes to how firms calculate risk-weighted assets for risk-based capital ratios, reducing variability in the
calculation of risk weights and so making capital ratios more consistent and comparable across the market, according to Phil
Evans, Director of Prudential Policy at the Bank of England. Pending the results of the consultation, the new standards will come
into force at the beginning of January 2025.
Mortgage Lending Slowdown To Weigh On UK Loan Growth In 2023

Key View
• We at Fitch Solutions forecast UK loan growth of 3.0% y-o-y in 2023, down from our previous forecast of 3.5%, and down from
estimated growth of 3.5% in 2022.
• Successive rate hikes by the Bank of England have driven up mortgage lending costs, which will weigh on housing and credit
demand in 2023.
• However, the impact of weaker demand for mortgages on banks’ profitability will be mitigated by higher net interest income as a
result of elevated interest rates. Non-housing consumer lending also remained high in Q422, with households taking on debt to
maintain existing expenditure during the cost-of-living crisis.
We at Fitch Solutions have revised down our forecast for client loan growth in the UK from 3.5% to 3.0% y-o-y in 2023,
down from 3.5% in 2022. We now forecast a recession in 2023, with real GDP contracting by 0.7%, down from 4.2% growth in
2022, which will weigh on private sector credit demand. Inflation rose from 5.5% y-o-y in January 2022 to 10.5% y-o-y in December,
which has prompted the Bank of England (BoE) to hike the Bank rate by a cumulative 340 basis points (bps) from December 2021,
to its present level of 3.50%. We expect interest rates to peak at 4.00% early in Q123, and thereafter to remain high until at least
H124. Although real interest rates remain deeply negative given the elevated level of inflation, such aggressive monetary tightening
- following years of historically low borrowing costs - will act as a headwind to loan growth in 2023 and 2024. The impact on
mortgage lending will be particularly severe; although consumer credit growth, where the full impact of higher interest rates is yet to
be felt, remained strong in Q422, mortgage lending growth has already begun to slow, as the weighted average interest rate on new
mortgages reached its highest level since 2013.
Recession To Weigh On Credit Growth

United Kingdom - Client Loans, % chg y-o-y & Client Loans, % Of GDP (2016–2023)
Source: Bank of England (BoE), Fitch Solutions
Mortgage lending growth began to slow in H222, as tighter monetary conditions weighed on demand. Despite strong
net mortgage lending in H122, which averaged GBP5.8bn per month, the mortgage market slowed in H222, with
average growth of GBP4.8bn between July and November. Although still above the market’s pre-pandemic six-month
average of GBP4.5bn, this represents a significant slowing from recent rates of growth: in June 2021, net mortgage credit grew by
GBP17.0bn m-o-m, whereas in October 2022 the same metric grew by only GBP3.6bn.
Net Mortgage Lending On A Downward Trend

United Kingdom - Net Mortgage Credit, m-o-m chg, GBPbn, seasonally adjusted (2019-2022)
Source: BoE, Fitch Solutions
Moreover, we expect mortgage lending growth to slow further in 2023, as interest rate hikes drag on the housing market. Approvals
for house purchases, which is a leading indicator for future mortgage lending activity, fell to 46,075 in November 2022, down from
68,969 in November 2021, and well below the most recent seasonally adjusted high of 107,102 in November 2020. We expect a
particularly notable decline in remortgaging activity, since around three-quarters of UK mortgages are fixed-rate. Following steady
growth across H221 and Q122, the number of remortgage approvals fell from 49,429 in February 2022 to 32,509 in November, as
higher interest rates began to weigh on remortgage growth. The Bank of England has been aggressively tightening monetary policy
since December 2021, which has caused corresponding increases in the interest rate on new mortgages: in November 2022, when
the BoE’s policy rate was at 3.00%, the weighted average interest rate on newly drawn mortgages reached 3.36%, its highest level
since March 2013. The Bank has since hiked rates again to 3.50%, and we expect further hikes in H123 to take interest rates to
4.00%, which will see mortgage rates rise even higher. Since January 2018, the spread between the BoE policy rate and the
weighted average interest rate on newly drawn mortgages has averaged 1.41 percentage points (pp); if this trend continues, then by
the time interest rates peak at 4.00% borrowers will be being charged 5.41% interest on mortgages, the highest rate since October
2008.
Rate Hikes Weighing On Mortgage Applications

United Kingdom - Number of Approvals (seasonally adjusted) (LHC) & Interest Rate, % (RHC)
Although we now forecast that interest rates will peak at 4.00% rather than 4.50% in 2023, which will mitigate the
impact of slowing mortgage lending growth, overall credit growth will slow by more than previously forecast - with
growth of 3.0 y-o-y rather than 3.5% - because of declining consumer credit growth. Rising living costs caused households
to take on increased personal debt in order to maintain their existing expenditure during 2022, but we expect consumer debt
uptake to moderate in 2023 as higher interest rates prompt households to cut their discretionary spending. Credit card borrowing
increased by GBP1.19bn in November 2022, the largest monthly increase since March 2004. Growth in other loans and advances
has also been elevated in recent months, averaging GBP0.5bn m-o-m between January and November 2022, compared with
GBP0.2bn across the same period in 2021, although growth did slacken somewhat in October and November. Households paid
back a cumulative GBP14.8bn in credit card debt on a net basis between March 2020 and February 2021, but they are now
approaching the limits of this headroom for further consumer lending growth: the recent record m-o-m increases have taken
cumulative credit card borrowing to GBP11.5bn between March 2021 and November 2022. We expect consumer lending growth to
level off in 2023 as interest rates on loans continue to rise and household budgets come under additional strain. Approximately
one-third of all UK households are mortgage holders, and of that number around a third are either due to refix in 2023 or are
already on variable rate deals. For the average borrower, this will mean that an increase in repayments of roughly GBP300 per month
(15.0% of median household disposable incomes). The government’s Energy Price Guarantee will also be significantly less generous
from April 2023, meaning that the amount households are charged for their electricity and gas usage will be capped at a higher
rate. We expect consumer spending to contract by 0.7% in 2023, which will weigh on consumer lending and overall credit growth.
Households Taking On Increasing Consumer Debt

United Kingdom - Net Consumer Credit, m-o-m chg, GBPbn, seasonally adjusted (2019-2022)
Tighter monetary policy will also lead to higher deposit growth in 2023. The average interest rate on new time deposits reached
3.27% in November 2022, its highest level since November 2008, although still deeply negative as a result of elevated inflation.
Despite these higher interest rates, savings growth was tepid throughout much of 2022, with 26.0% of UK adults reporting that they
were dipping into their savings in order to sustain their consumption in response to increases in the cost of living, according to data
collected by the Office for National Statistics for its regular Opinions and Lifestyle Survey in December 2022-January 2023. In June
2022, Household M4 grew by just GBP2.7bn m-o-m, the smallest monthly increase since January 2019. In recent months, however,
the higher interest rates available to savers have started to affect household behaviour. Household M4 grew by an average of
GBP5.5bn between July and November 2022, with the household savings ratio increasing from 6.7% in Q222 to 9.0% in Q322. We
forecast that deposits will grow by 5.5% y-o-y in 2023, up from an estimated 3.0% in 2022.
Household Savings Rate Beginning To Rise

United Kingdom - Household M4, m-o-m chg, GBPbn, seasonally adjusted (2019-2022)
Business lending has stagnated in recent months, as large corporates and small- and medium- sized enterprises
(SMEs) adopted more defensive strategies in response to the less-favourable outlook for business investment. The
BoE’s Q422 Agents’ Summary of Business Conditions reported that credit availability had tightened in recent months, especially for
non-investment grade firms. SMEs are finding it more difficult to obtain credit from banks, which are requiring greater security
against new lending, or amending conditions for existing loans; as a result, lending to SMEs has contracted every month since March
2021. It was also noted that higher interest rates are encouraging firms to reduce debt and build cash buffers instead. Companies
that felt obliged to build up stocks in order to manage supply chain disruption reported having less cash available for investment,
while consumer services firms reported that they had paused or reduced their investment plans owing to weak demand, tighter
financial conditions and uncertainty about the UK’s economic outlook. Indeed, in October 2022, net bank lending to non-financial
businesses fell to GBP-7.8bn m-o-m, down from GBP2.7bn in September, and well below the 12-month pre-pandemic average of
GBP0.45bn per month between March 2019 and February 2020. Average growth across the eleven months from January to
November 2022 came in at GBP0.85bn per month.
In Deloitte’s Q422 Survey of Chief Financial Officers, only 12.0% of CFOs reported that increasing capital expenditure was a strong
priority for their businesses over the next 12 months, down from 13.0% in Q322 and 37.0% in Q421. Instead, they are pivoting
towards strategies such as prioritising cost reduction (as 48.0% of CFOs reported), increasing cash flow (43.0%) or reducing leverage
(21%), which amounted to ‘the weakest focus on expansionary strategies in two-and-a-half years and the strongest focus on
defensive strategies in two years.’ In the eleven months since December 2021 (when the BoE’s hiking cycle commenced),
aggregate net issuance of private sector bonds was negative in seven of them. Previously, when large repayments have been made
one month, they have been effectively reversed by substantial borrowing the following months, but following the record repayment
of GBP5.8bn in June 2022, July saw further net repayment of GBP0.6bn. Net repayments remained high in September and
November as well, which may indicate that firms have been responding to increase financing costs by making use of the cash they
accumulated during the Covid-19 pandemic. Businesses’ total liquid assets increased by a massive 37.8% between February 2020
and May 2022, before declining by 0.9% in June 2022. Although ordinarily this large cash pile could be used for increased
investment without the need to take on credit, in light of the worsening UK economic outlook it seems likely that these funds will
instead be used by businesses to increase cash flow and reduce leverage. We expect lending to businesses to slow further going in
H123 as a result.
Businesses De-Leveraging Amidst Higher Borrowing Costs

United Kingdom - Net Lending To NFCs, m-o-m chg, GBPbn, seasonally adjusted (2019-2022)
Strong Outlook For Bank Profitability
Despite the challenges posed by stagnating business lending, a mortgage slowdown and a looming decline in consumer credit,
higher interest rates will boost banks’ net interest income in the medium term. We forecast a further 50bps of rate hikes before the
BoE’s process of monetary tightening is complete, with risks to this outlook titled to the upside: should structural developments
such as the impact of the green transition and geopolitics of energy, deglobalisation and increased labour bargaining power on
account of Brexit, demographic shifts or onshoring cause inflation to remain higher for longer, then we would expect the Bank to
continue hiking rates in order to fulfil its mandate.
In the gilt market, there was significant volatility in Q422 following the Truss government’s ‘mini-Budget’ in late September, with gilt
yields surging in the aftermath of the announcement. The BoE intervened to buy nearly GBP20.0bn of gilts in order to restore
orderly market conditions, whilst also postponing the beginning of its quantitative tightening programme until November 1. Yields
on both short- and long-dated gilts fell back to pre-mini-Budget levels in late October following Liz Truss’s resignation, although we
expect long-term gilt yields to rise again in 2023. The gilt issuances associated with the government’s fiscal plans, as well as the
BoE’s quantitative tightening efforts, which have seen the Bank reduce its balance sheet from around GBP850.0bn in September to
GBP770.0bn at end-2023, will create greater supply for the market to absorb, pushing up yields. Nonetheless, we do not expect the
BoE to reverse course on its balance sheet reduction plans, as the bar for doing so is very high.
Forecast Tables
UNITED KINGDOM - ASSETS FORECASTS (2021–2026)
Indicator 2021 2022e 2023f 2024f 2025f 2026f
Total assets, GBPmn 8,902,141 9,258,226 9,559,119 9,893,688 10,289,435 10,649,565
Total assets, USDmn 11,959,136 11,172,827 11,853,307 12,663,920 13,170,477 13,631,444
Total assets, % of GDP 392.1 366.8 366.6 370.4 370.5 371.8
Total assets, % y-o-y 4.4 4.0 3.3 3.5 4.0 3.5
Client loans, GBPmn 2,006,633 2,076,865 2,139,171 2,224,737 2,313,727 2,406,276
Client loans, USDmn 2,695,710 2,506,360 2,652,572 2,847,664 2,961,571 3,080,034
Client loans, % of GDP 88.4 82.3 82.0 83.3 83.3 84.0
Client loans, % y-o-y 2.9 3.5 3.0 4.0 4.0 4.0
Client loans, USD per capita 40,066 37,126 39,159 41,901 43,437 45,033
Client loans, % of total assets 22.5 22.4 22.4 22.5 22.5 22.6
e/f = Fitch Solutions estimate/forecast. Source: Bank of England (BoE), Fitch Solutions
UNITED KINGDOM - ASSETS FORECASTS (2027–2032)
Total assets, GBPmn 11,022,300 11,408,081 11,807,364 12,220,621 12,648,343 13,091,035
Total assets, USDmn 14,108,544 14,602,344 15,113,426 15,642,395 16,189,879 16,756,525
Total assets, % of GDP 373.1 374.4 375.7 377.2 379.1 381.1
Total assets, % y-o-y 3.5 3.5 3.5 3.5 3.5 3.5
Client loans, GBPmn 2,502,527 2,602,628 2,706,733 2,815,003 2,927,603 3,044,707
Client loans, USDmn 3,203,235 3,331,364 3,464,619 3,603,204 3,747,332 3,897,225
Client loans, % of GDP 84.7 85.4 86.1 86.9 87.8 88.6
Client loans, % y-o-y 4.0 4.0 4.0 4.0 4.0 4.0
Client loans, USD per capita 46,693 48,421 50,217 52,087 54,033 56,057
Client loans, % of total assets 22.7 22.8 22.9 23.0 23.1 23.3
f = Fitch Solutions forecast. Source: BoE, Fitch Solutions
UNITED KINGDOM - LIABILITIES FORECASTS (2021–2026)
Indicator 2021 2022e 2023f 2024f 2025f 2026f
Total liabilities and capital, GBPmn 8,902,141 9,258,226 9,559,119 9,893,688 10,289,435 10,649,565
Total liabilities and capital, USDmn 11,959,136 11,172,827 11,853,307 12,663,920 13,170,477 13,631,444
Total liabilities and capital, % of GDP 392.1 366.8 366.6 370.4 370.5 371.8
Total liabilities and capital, % y-o-y 4.4 4.0 3.3 3.5 4.0 3.5
Client deposits, GBPmn 2,421,185 2,493,820 2,630,980 2,775,684 2,942,225 3,118,759
Client deposits, USDmn 3,252,619 3,009,542 3,262,416 3,552,876 3,766,048 3,992,011
Client deposits, % of GDP 106.6 98.8 100.9 103.9 105.9 108.9
Client deposits, % y-o-y 6.9 3.0 5.5 5.5 6.0 6.0
Client deposits, USD per capita 48,343 44,579 48,163 52,277 55,236 58,368
Client deposits, % of total liabilities 27.2 26.9 27.5 28.1 28.6 29.3
e/f = Fitch Solutions estimate/forecast. Source: BoE, Fitch Solutions
UNITED KINGDOM - LIABILITIES FORECASTS (2027–2032)

Total liabilities and capital, GBPmn 11,022,300 11,408,081 11,807,364 12,220,621 12,648,343 13,091,035
Total liabilities and capital, USDmn 14,108,544 14,602,344 15,113,426 15,642,395 16,189,879 16,756,525
Total liabilities and capital, % of GDP 373.1 374.4 375.7 377.2 379.1 381.1
Total liabilities and capital, % y-o-y 3.5 3.5 3.5 3.5 3.5 3.5
Client deposits, GBPmn 3,305,884 3,504,237 3,714,492 3,937,361 4,173,603 4,424,019
Client deposits, USDmn 4,231,532 4,485,424 4,754,549 5,039,822 5,342,212 5,662,745
Client deposits, % of GDP 111.9 115.0 118.2 121.5 125.1 128.8
Client deposits, % y-o-y 6.0 6.0 6.0 6.0 6.0 6.0
Client deposits, USD per capita 61,683 65,195 68,914 72,855 77,030 81,453
Client deposits, % of total liabilities 30.0 30.7 31.5 32.2 33.0 33.8
f = Fitch Solutions forecast. Source: BoE, Fitch Solutions
UNITED KINGDOM - KEY RATIOS FORECASTS (2021–2032)
Indicator 2021 2022e 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f 2032f
Loan/deposit ratio 82.88 83.28 81.31 80.15 78.64 77.15 75.70 74.27 72.87 71.49 70.15 68.82
Loan/asset ratio 22.54 22.43 22.38 22.49 22.49 22.60 22.70 22.81 22.92 23.03 23.15 23.26
e/f = Fitch Solutions estimate/forecast. Source: BoE, Fitch Solutions
Competitive Landscape
The UK's banking sector is one of the largest, both in the region and globally. There are 357 banks active in the market, including a
range of domestic and multinational entities as well as 43 building societies. Much of the market is dominated by the 'Big Four' -
Barclays, HSBC, Lloyds and National Westminster (NatWest) - alongside several other key banks, including Santander and
Nationwide. Strongly entrenched competition limits the scope for new entrants; however, challenger banks, particularly digital
banks such as Monzo and Revolut, have the potential to disrupt the market.
Following the 2008 global financial crisis, the UK's banking sector underwent a period of consolidation, including the merger
of Halifax Bank of Scotland with Lloyds TSB, which formed Lloyds Banking Group, and the takeover of Virgin
Money by Yorkshire Bank Group. A number of controversies in the banking sector after the financial crisis and the collapse
of Lehman Brothers resulted in a regulatory shake-up of the industry, including the Libor scandal and mis-selling of payment
protection insurance (PPI), which had significant cost implications.
Latest Developments
• In January 2023, Reuters reported that Andrew Bailey, the Governor of the Bank of England (BoE) and long-time crypto sceptic,
had questioned the need for a central bank digital currency (CBDC) in the UK. Bailey noted that the BoE was in the process of
updating its real-time gross settlement system (RTGS), which holds the account of the UK’s banks and other financial institutions
at the BoE, whilst reiterating his scepticism that retail systems needed ‘this sort of upgrade at the moment’. The idea of a digital
pound, or ‘Britcoin’, was first suggested by then-Chancellor Rishi Sunak in April 2021. The government is set to launch a public
consultation on the legal attributes of the Britcoin in the coming weeks, if the decision is taken to proceed with the idea.
• In December 2022, Deputy Governor of the Bank of England Sir Jon Cunliffe remarked that the collapse of FTX showed that
cryptocurrency was too dangerous to remain outside mainstream financial regulation, and could pose a systemic risk without
action, especially if the crypto sector continued to develop links and integrate with the traditional financial system. The collapse
of FTX left more than 1mn customers unable to withdraw assets worth an estimated USD8.0bn; around 80,000 of these
customers were based in the UK.
• In June 2022, the government announced a 12-month extension to its trading plan selling off part of the Treasury’s shareholding
in NatWest Group. UK Government Investments still owns a 48.5% stake in NatWest, which it has committed to returning to full
private ownership between 2025 and 2026. The current trading plan, which began in August 2021 and has seen approximately
703.5mn shares sold, raising around GBP1bn, will now end on August 11 2023. In March 2022, NatWest Group bought back
550mn shares from the Treasury for 220.5p per share; the government paid an average of 500p per share in 2008.
• In March 2022, it was widely reported that Apple had acquired Credit Kudos, a London-based startup which uses open
banking to enable more informed credit checks. This is a continuation of a recent trend of major US companies acquiring
European fintech in the nascent open banking space; Mastercard acquired Finicity in 2020 and Aiia in 2021,
while Visa purchased Tink in 2021, having failed an attempt to acquire Plaid.
The top of the UK banking sector is concentrated, with the four largest banks together accounting for more than 75.0% of
customer accounts and the vast majority of assets. Limited competition is a risk factor, and the BoE and the Competition and
Markets Authority are keen to see competition levels raised through market regulation and the introduction of new challenger
banks in order to reduce risks from institutions deemed too big to fail. While digital banks are growing rapidly, the market remains
mostly dominated by the 'Big Four' for the time being.
UNITED KINGDOM - TOP 10 COMMERCIAL AND RETAIL BANKS BY TOTAL ASSETS, GBPMN (2022)
Total Weighted Total Common

Total Assets Date
Risks Equity
HSBC Holdings 2,991,965 828,315 185,993 9/30/2022
Barclays 1,726,899 350,774 54,733 9/30/2022
Lloyds Banking Group 892,922 210,822 40,173 9/30/2022
Standard Chartered 864,435 252,293 42,004 9/30/2022
National Westminster Bank 437,050 106,211 18,290 6/30/2022
Bank of Scotland 315,353 na 12,658 6/30/2022
Santander UK Group Holdings 295,200 71,433 15,700 9/30/2022
Nationwide Building Society 279,934 50,791 14,952 9/30/2022
Virgin Money 91,907 24,148 5,674 9/30/2022
Yorkshire Building Society 56,410 na 3,270 6/30/2022
Note: Data are latest available; na = not available. Source: Company reports, Fitch Solutions
The largest bank by total assets in the UK as of September 30 2022 was HSBC, with total assets of GBP2,992.0bn and total common
equity of GBP186.0bn. The company is headquartered in London and is one of the world's largest banking and financial services
organisations, with 40mn customers globally. Its international network covers 63 markets in Europe, Asia-Pacific, the Americas, the
Middle East and Africa. With listings on the London, Hong Kong, China; New York and Bermuda stock exchanges, shares in HSBC
Holdings are held by around 182,000 shareholders in 128 markets. The bank has operations in retail banking and wealth
management, commercial banking, global banking and markets, and global private banking. HSBC UK was created on July 1 2018 in
response to the Financial Services (Banking Reform) Act 2013, which required that all banks 'ring-fence' their core banking services
in the UK by the start of 2019. Rivals Lloyds and Barclays have made similar moves. In late 2019, HSBC CFO Ewen Stevenson
announced that the bank planned to restructure the business in the UK following heavy Q319 losses. The restructuring plan, which
was released in February 2020, is set ultimately to entail 35,000 job losses, as part of a cost-cutting initiative. Suspended in March
2020 owing to the Covi-19 pandemic, the restructuring plan resumed in June 2020, and is still under way. In September 2022, the
bank made cuts to the front-line staff in its London global banking unit, spanning the ranks from vice-president to managing
director.
UNITED KINGDOM - TOP 10 BANKS - ASSET QUALITY (2022)
Growth Of Reserves for NPL Charges

Gross Loans NPL Ratio (%) NPLs (% of (% of gross Date
(%) NPLs) loans)
HSBC Holdings -7.5 1.8 60.0 0.3 9/30/2022
Barclays 15.1 1.7 80.5 0.3 9/30/2022
Lloyds Banking Group 1.9 2.5 41.0 0.3 9/30/2022
Standard Chartered -4.3 2.5 71.5 0.2 9/30/2022
National Westminster Bank 2.5 1.2 62.8 0.0 6/30/2022
Bank of Scotland 1.4 2.7 32.7 0.0 6/30/2022
Santander UK Group Holdings 2.5 na na 0.2 9/30/2022
Nationwide Building Society 2.6 0.7 53.3 0.1 9/30/2022
Virgin Money -0.3 1.4 43.8 0.1 9/30/2022
Yorkshire Building Society 3.3 0.8 15.7 0.0 6/30/2022
The second largest bank as of the end of Q322 was Barclays, with total assets of GBP1,726.9bn and total common equity of
GBP54.7bn. Like HSBC, it has major operations outside the UK but is headquartered in London. Barclays operates in more than 40
markets, employing around 83,500 people. It has been active in divestments in recent years, offloading its Barclays Global
Investors subsidiary to US-based investment management firm BlackRock in December 2009 in a USD13.5bn cash and stock
deal. In June 2015, Barclays Capital sold off its Wealth and Investment Management unit in Florida, and in October 2015 Barclays
announced that it would sell GBP650.0mn of its performing loan portfolio in an effort to shore up its balance sheet. This was
followed in 2018 by the announcement that Barclays would exit Africa. Operations under Barclays Africa Group have been
renamed Absa Group, and Barclays is gradually reducing its shareholding in the South African bank.
UNITED KINGDOM - TOP 10 BANKS - EARNINGS AND PROFITABILITY (2022)

Operating
Net Interest Operating Net Income
Expenses (% Profit (% of
Income (% of Profit (% of (% of
of gross risk- Date
earning average average
revenues) weighted
assets) assets) equity)
assets)
HSBC Holdings 1.3 66.2 0.6 2.0 8.7 9/30/2022
Barclays na 66.5 0.5 2.2 10.9 9/30/2022
Lloyds Banking Group 1.7 52.9 0.8 3.3 12.1 9/30/2022
Standard Chartered 1.1 64.3 0.7 2.2 9.7 9/30/2022
National Westminster Bank 2.1 53.4 1.2 5.1 20.8 6/30/2022
Bank of Scotland 1.7 55.4 0.8 na 13.9 6/30/2022
Santander UK Group Holdings 1.9 52.9 0.7 2.8 10.1 9/30/2022
Nationwide Building Society 1.7 50.6 0.7 3.8 9.9 9/30/2022
Virgin Money 1.8 62.2 0.7 2.5 9.5 9/30/2022
Yorkshire Building Society 1.4 37.5 0.9 na 11.8 6/30/2022
Note: Data are latest available. na = not available. Source: Company reports, Fitch Solutions
Lloyds Banking Group ranks as the third largest bank, with total assets of GBP892.9bn as of the end of Q322. Subsidiary Bank of
Scotland, which became part of the Lloyds Group following the acquisition of HBOS during the global financial crisis in 2008-2009,
is the sixth largest bank, with assets of GBP315.4bn as of end-June 2022. Lloyds was the recipient of GBP17.0bn under the Bank
Recapitalisation Fund following the global financial crisis, and came under partial government ownership, until the government sold
its remaining stake in the bank in 2017. The aftermath of the crisis and resulting public bailouts had a marked impact on the
structure of the bank; Lloyds came under considerable scrutiny from domestic and European regulators, and was advised to sell a
significant number of its assets. Under this initiative, in 2014 the company divested TSB Bank.
UNITED KINGDOM - TOP 10 BANKS - CAPITAL AND LEVERAGE (2022)
Tangible Net Income

Common Equity Common Equity Minus Cash
Date
(% of tangible Tier 1 Ratio Dividends (% of
assets) total equity)
HSBC Holdings 6.2 13.4 8.5 9/30/2022
Barclays 2.3 13.8 10.9 9/30/2022
Lloyds Banking Group 4.5 15.0 11.4 9/30/2022
Standard Chartered 4.2 13.7 9.4 9/30/2022
National Westminster Bank 4.2 11.6 20.8 6/30/2022
Bank of Scotland 3.3 na 14.4 6/30/2022
Santander UK Group Holdings 5.3 15.5 10.7 9/30/2022
Nationwide Building Society 5.0 25.5 10.1 9/30/2022
Virgin Money 5.9 15.0 11.8 9/30/2022
Yorkshire Building Society 5.8 16.6 12.2 6/30/2022
Note: Data are latest available. na = not available. Source: Company reports, Fitch Solutions
Standard Chartered is the fourth largest bank by assets, which totalled GBP864.4bn as of the end of September 2022. Standard
Chartered is a major international bank with no retail or commercial operations in the UK, instead being a market leader in a number
of overseas markets. It does, however, offer private banking services to high-net-worth individuals in the UK and globally. Standard
Chartered has a broad global presence, with more than 1,000 branches spanning more than 59 markets, served by around 85,000
employees.
Following Standard Chartered in terms of assets is another key domestic commercial/retail bank, NatWest, which is part of
the NatWest Group (rebranded from the Royal Bank of Scotland Group in July 2020). NatWest had assets of GBP437.1bn as at
end of September 2022. In March 2022, the UK government announced that NatWest would buy back 550mn of its shares held by
the government for GBP1.2bn. This reduced the government’s stake from 50.6% to 48.1%, taking it below 50% for the first time
since the GBP46.0bn bailout in 2008 (the government’s stake peaked at 84.0% in 2009). The government has granted an extension
to its current trading plan for selling part of HM Treasury’s shareholding in the bank, till August 11 2023; the government’s intention
is for the bank to return to private ownership by 2025/26. The Treasury still holds more than 5.0bn shares and around 48% of its
voting rights. Other brands operating under the group include private bank Coutts and Isle of Man Bank, as well as the Royal
Bank of Scotland brand, which is maintained in Scotland.
UNITED KINGDOM - TOP 10 BANKS - FUNDING AND LIQUIDITY (2022)
Loans (% of Interbank Assets Customer

customer (% of interbank Deposits (% of Date
deposits) liabilities) total funding)
HSBC Holdings 62.4 101.5 75.5 9/30/2022
Barclays 73.0 na 51.5 9/30/2022
Lloyds Banking Group 95.2 na 74.6 9/30/2022
Standard Chartered 65.6 153.1 69.3 9/30/2022
National Westminster Bank 85.8 17.6 85.2 6/30/2022
Bank of Scotland 168.6 37.5 80.8 6/30/2022
Santander UK Group Holdings 115.5 na 73.3 9/30/2022
Nationwide Building Society 114.0 13.1 72.0 9/30/2022
Virgin Money 110.5 9.0 78.7 9/30/2022
Yorkshire Building Society 111.6 9.4 74.0 6/30/2022
While the UK is generally regarded as having a 'Big Four' banking landscape, in reality there are a number of other major banking
providers in the country when measured by total assets. Beyond the traditional market leaders, there is also Santander, Virgin
Money and Nationwide Building Society. Santander is a subsidiary of Spain-based Santander Group, and entered the UK market
through the purchase of the Abbey National building society in 2004. The company's operations incorporated two other building
societies: Alliance & Leicester in 2008 and Bradford & Bingley in 2010.
Nationwide is the largest building society in the world, offering a range of banking and financial services. It is the largest purely UK-
focused banking services provider in the market. The company has been formed through more than 100 mergers and acquisitions
over its history, and is now larger than all other UK building societies combined.
Virgin Money is also the product of a series of acquisitions; in 2018 it was acquired by CYBG for GBP1.7bn. CYBG also
owns Yorkshire Bank. In 2019, CYBG rebranded as Virgin Money, and the Virgin Money brand is being rolled out
across Clydesdale Bank and Yorkshire Bank.
The banking sector faces disruption from the development of fintech companies that offer traditional banking services alongside
modern delivery platforms, creating a highly user-friendly model. The UK is a major base for fintech companies, with firms such as
Monzo and Revolut springing up in recent years and attracting significant investor and consumer interest. Both these companies
offer app-based banking services, allowing users to make payments, transfer funds and track their spending in real time. Other
companies, such as LendInvest, Crowdcube and Seedrs, offer crowdfunding and peer-to-peer lending, while Nutmeg provides
investment management services. Few of these firms, most of which are relatively new startups, offer the same range of services as
traditional banks, but their specialisation and use of modern technology make them extremely attractive as financial services
providers for consumers and small- and medium-sized enterprises. There is likely to be significant merger and acquisition activity in
the fintech sector over coming years as traditional banks move into the space and new players consolidate, making it an extremely
dynamic and fast-growing area of the UK's banking industry.
Regulatory Environment
The UK's banking industry is one of the world's most stringently regulated. The government enacted a series of wide-reaching
market reforms in the wake of the 2008-2009 global financial crisis, aimed at improving the resilience of the banking sector and
reducing vulnerability by enhancing industry oversight, introducing higher standards of conduct and increasing the protections in
place for consumers. While the UK's departure from the EU is unlikely to have a substantial impact on market regulation, some
legislative updates are likely over the coming years.
Prior to the global financial crisis, the approach to banking regulation in the UK was considered 'light-touch'; after decades of
deregulation there was limited government control or oversight. As the financial crisis unfolded, the government was forced to step
in and, through the Bank of England (BoE), it provided financial support to several major financial institutions, including Northern
Rock, Bradford and Bingley Building Society and the Royal Bank of Scotland Group, in some cases enforcing partial
nationalisation.
In the wake of the global financial crisis, the government announced a series of measures to overhaul the system of banking
regulation and oversight in the UK. The introduction of the Financial Services Act 2012 saw the Financial Services Authority
replaced by a two-pronged system comprising the Prudential Regulation Authority (PRA), part of the BoE, and the Financial Conduct
Authority (FCA). The PRA and FCA have been heavily involved in the development of financial services regulation, including EU-wide
regulation.
High-level banking policy and directives are determined by the Treasury, while monetary policy is controlled by the BoE, in
conjunction with regional and global policy development. The current focus of Treasury policy remains to solidify stability in the
banking sector. It cites its priorities as, among others, 'creating stronger and safer banks' and 'improving regulation of the financial
sector to protect customers and the economy'. Under the Treasury single departmental plan, it refers to its ongoing work with the
BoE, PRA and FCA to monitor the banking sector and to assess and address risks. The Treasury is also overseeing the management
of nationalised banking sector assets and their eventual reprivatisation.
The BoE, via the Monetary Policy Committee and the Financial Policy Committee, is responsible for wider financial system stability. In
addition, as during the financial crisis, the BoE acts as a lender of last resort for struggling financial institutions and, in the event of
collapse, takes over management of failed financial firms. The BoE sets the Bank Rate (main policy rate), manages quantitative
easing and works under an inflation targeting regime (currently set by the government at 2.0%).
As a former member of the EU, banking regulations in the UK were aligned with EU policy and, broadly speaking, EU law was copied
into UK law at the end of the transition period on December 31 2020. The PRA, FCA and other bodies had played a significant role in
developing EU financial regulations and directives, such as the Markets in Financial Instruments Directive (MiFID) and MiFID II, the
New Market Abuse Directive, Capital Requirements Regulations and Benchmark Regulations. In order for UK-based banks to
continue trading in EU markets post Brexit, financial institutions will need to comply with EU reporting standards and benchmarks,
making UK policy highly unlikely to dramatically alter following the country's exit from the EU.
In December 2022, the government announced a package of regulatory reforms collectively dubbed ‘the Edinburgh Reforms’. The
proposed reforms include:
• Reforming the ring-fencing regime for banks, which separates retail banks from their riskier investment activities.
• Commencing a review into reforming the Senior Managers and Certification Regime, which governs how senior executives are
hired, monitored and sanctioned.
• Reforming the EU’s Solvency II rules, which prevent insurance companies from investing in illiquid assets such as housing and
windfarms.
• Adding a secondary objective of ensuring competitiveness to the mandates of the Financial Conduct Authority (FCA) and
Prudential Regulation Authority (PRA).
• Through the Financial Services and Markets Bill (FSM), repealing and reforming regulations transferred via Retained EU Law
(REUL) such that most financial regulations become regulators’ rules rather than primary or secondary legislation.
• Reform to securitisation regulation.
However, although the Edinburgh Reforms are the first major post-Brexit revision to the UK’s regulatory rulebook for banking, we
believe that they are unlikely to substantially boost the UK’s competitiveness as a financial hub as the government intends, as they
are too limited in scope or ambition to have more than marginal impact.
Key Legislation
Banking regulation in the UK is extensive, based on legislation, case law and policy (such as the annual budget review). In terms of
regulatory oversight, the key piece of legislation is the Financial Services Act. Additional key legislation includes:
• Financial Services and Markets Act 2000

• Banking Act 2009 (and amendments)
• Financial Services (Banking Reform) Act 2013
• Bank of England and Financial Services Act 2016
• Payment Services Regulations 2017
• Capital Requirements Regulations and the Capital Requirements Directive (CRD IV)
• Bank Recovery and Resolution Directive
• EU Insolvency Regulation and EU Reorganisation and Winding Up Directive
EU directives were implemented via primary and secondary legislation as well as the regulations governing the FCA and PRA. The
UK also participates in voluntary guidelines such as those set by the Basel Committee on Banking Supervision (currently in the
process of implementing Basel III regarding bank capital requirements).
Industry Regulators
The Financial Services Act saw the creation of the PRA, which sits under the BoE and is responsible for ensuring the stability of
around 1,500 financial services firms, including banks, building societies, credit unions, insurers and major investment firms.
The PRA has three statutory objectives:
• the promotion of the safety and soundness of financial services firms under its remit
• protection for insurance policyholders
• the facilitation of effective competition
Under the government’s proposed FSM Bill, both the PRA and the FCA would receive new secondary objectives of boosting
economic growth and the UK’s international competitiveness, while maintaining their primary objectives.
In the banking sector, the PRA is responsible for introducing initiatives such as the ring-fencing of core financial services and
facilities. It is also responsible for the CRD IV (EU prudential rules) and a broad range of reporting requirements. The PRA issues
authorisation for firms to carry out regulated activities and sets out industry standards and policies such as the PRA's Remuneration
Code.
The Financial Services Act also created the FCA, which acts as the conduct regulator for approximately 50,000 financial services
firms. The FCA is responsible for the implementation, supervision and enforcement of domestic legislation as well as of EU and
international standards. It is funded by fees charged to financial services firms. The FCA also provides authorisation for some firms/
individuals (the Financial Services Register provides a list of authorised firms/individuals both under the FCA and PRA).
While the PRA has prudential and conduct oversight of banks, the FCA has oversight of some related sectors via subsidiary bodies
such as the Payment Systems Regulator, which is the economic regulator for the GBP92.0trn payment systems industry.
The PRA has a range of actions at its disposal to enforce regulation, including investigating financial service providers, imposing
reporting requirements and assessing risks. As the body which authorises firms in the financial sector, the PRA can revoke or
suspend authorisation, impose requirements, investigate firms and individuals and impose financial penalties, restrictions or public
censure. The FCA also has the power to impose financial penalties and public censure.
Banks and other financial services providers require authorisation from the PRA and/or the FCA to operate in the market (with some
exemption having existed under EU freedom of service) and are subject to expansive operational requirements. The FCA's
operational requirements are based on the 11 Principles, which include financial prudence, management and control and relations
with regulators. In conjunction with the PRA, the FCA also enforces regulatory measures such as the Senior Managers Regime,
Certification Regime and Senior Insurance Managers Regime. The FCA lists sectors that must meet required standards: business
plans, risks, budgets, resources, systems, controls and whether key staff have the necessary qualifications, experience, and ability to
carry out their roles effectively. Requirements are set out under the PRA Rulebook and FCA Code of Conduct as well as various
instruments.
One of the main operational requirements enforced by the PRA (and one which evolved in the wake of the global financial crisis)
relates to capitalisation. The PRA oversees and enforces the EU prudential rules under CRD IV, which implements the Basel III
agreement throughout the EU. Under CRD IV, banks (as well as investment firms and building societies) must meet enhanced
standards relating to the quality and quantity of capital, liquidity and leverage requirement and counter-party risks. Banks must also
meet new macro-prudential standards.
In November 2022, the PRA opened a consultation on proposed new rules covering the parts of the Basel III standards that remain
to be implemented in the UK. The so-called ‘Basel 3.1’ standards would see significant changes to how firms calculate risk-weighted
assets for risk-based capital ratios from January 2025, reducing variability in the calculation of risk weights and so making capital
ratios more consistent and comparable across the market.
Industry Association
The banking industry is now represented by UK Finance, which integrated former industry association the British Bankers
Association. UK Finance also incorporates the Asset Based Finance Association, the Council of Mortgage Lenders, Financial Fraud
Action UK, Payments UK and the UK Cards Association. It reports having more than 300 members that provide a range of credit,
banking, markets and payment services. The scope of its membership means that the organisation is highly influential in
determining the direction of banking regulation and policy. As well as contributing to government white papers and providing
feedback, UK Finance also develops its own industry guidance in order to raise professional standards on matters relating to, for
example, data protection, payment processes and consumer protection.
Insurance
Insurance Snapshot
Key View: The UK boasts a large and mature insurance industry in both the life and non-life sectors. Life insurance cover in
particular is well established, although the current high rates of cover in this sector limit future growth potential from existing
product lines. There are also headwinds to development in the short term from inflation and economic uncertainty. However, there
are gaps in coverage that could be exploited by product diversification and direct digital sales.
Life Insurance To Outperform

United Kingdom - Insurance Premiums By Sector (2021–2032)
e/f = Fitch Solutions estimate/forecast. Source: OECD, Fitch Solutions
• The short-term outlook for the insurance industry is positive, albeit subdued compared with previous forecasts, reflecting the
current political and economic uncertainty in the UK. High inflation and tighter monetary policy will combine to curb growth
momentum across the rest of our forecast period.
• Life insurance accounts for around three-quarters of total underwriting activity in the market. Gross premiums in the life sector
are forecast to increase by 6.6% in 2023, down from an estimated 10.4% in 2022, to reach a total of GBP224.8bn. Gross
premiums will then grow by an average of 4.6% a year over the remainder of the medium-term forecast period to 2027.
• In the non-life sector, we expect growth of 2.7% in 2023, down from 4.6% in 2022, which will bring premiums to a total of
GBP71.9bn. Slower growth averaging 2.4% a year is expected over the medium term to 2027, driven primarily by the leading
property, general liability and motor insurance segments.
UNITED KINGDOM - GROSS INSURANCE PREMIUMS WRITTEN (2021–2026)

Indicator 2021 2022e 2023f 2024f 2025f 2026f
Gross life premiums written, GBPbn 190.9 210.8 224.8 232.2 246.6 257.2
Gross life premiums written, GBP, % chg y-o-y 7.7 10.4 6.6 3.3 6.2 4.3
Gross non-life premiums written, GBPbn 67.0 70.0 71.9 73.5 75.3 77.1
Gross non-life premiums written, GBP, % chg y-o-y 6.2 4.6 2.7 2.2 2.6 2.3
Total gross premiums written, GBPbn 257.9 280.8 296.6 305.6 322.0 334.3
Total gross premiums written, GBP, % chg y-o-y 7.3 8.9 5.6 3.0 5.3 3.8
e/f = Fitch Solutions estimate/forecast. Source: OECD, Fitch Solutions
UNITED KINGDOM - GROSS INSURANCE PREMIUMS WRITTEN (2027–2032)

Gross life
premiums 268.6 280.9 294.2 308.0 322.1 337.0
written, GBPbn
Gross life
premiums
4.4 4.6 4.7 4.7 4.6 4.6
written, GBP, %
chg y-o-y
Gross non-life
premiums 78.9 80.7 82.5 84.4 86.2 88.1
written, GBPbn
Gross non-life
premiums
2.3 2.3 2.3 2.2 2.2 2.2
written, GBP, %
chg y-o-y
Total gross
premiums 347.5 361.6 376.7 392.4 408.3 425.0
written, GBPbn
Total gross
premiums
3.9 4.1 4.2 4.2 4.1 4.1
written, GBP, %
chg y-o-y
f = Fitch Solutions forecast. Source: OECD, Fitch Solutions
The UK insurance industry is among the largest and most competitive in the world. The market writes a large volume of premiums
annually, and the competitive landscape is comprised of a broad range of providers, including both major domestic companies and
multinationals. UK-based companies often have overseas operations and are able to compete with foreign-based companies in
their domestic market. Enhanced solvency requirements have been introduced, which mean that most providers are very well
capitalised. This should allow them to weather any post-Brexit uncertainty, or the impact of weaker growth and a more challenging
geopolitical and macroeconomic backdrop.
Latest Developments
• There is room for consolidation in both the life and non-life insurance segments. Both are composed of hundreds of providers,
and high costs combined with intense competition could result in cost-saving mergers.
• Research from the Confused.com Car Insurance Price Index published in January 2023, in association with Willis Towers
Watson, revealed that UK car insurance premiums had seen their largest annual rise in six years. Premiums increased by 19.0%
in 2022, which means that UK motorists are now paying an average of GBP629 for their car insurance, up by GBP100 y-o-y.
Upwards price pressure on premiums has come from persistently high inflation, new FCA pricing rules, supply chain disruption,
labour shortages and higher energy prices, all of which will continue into 2023. Nonetheless, rising interest rates, and the
potential for inflation to fall, will help insurers’ overall profitability in 2023, albeit amidst headwinds from falling household
incomes, cost-of-living pressures and volatility in financial markets, which will weigh on insurance demand.
• In January 2023, Insurance Post reported that the partnership between Ageas and Age UK will not be extended for a further
decade, but will lapse in 2025. Under the partnership, which has been in place since 2006, the insurer provides home, motor and
travel insurance for the charity’s customers.
• In January 2023, it was reported that Candid, the UK-based insurtech firm owned by Clark Group, will join forces with Swiss
Re’s iptiQ to provide affordable and accessible life insurance solutions to UK customers. iptiQ’s cutting-edge digital B2B2C
insurance platform will be distributed through Candid’s well-established Polly and Tom brands, which offer targeted and
affordable life insurance solutions to mothers and fathers respectively.
• In November 2022, the government announced its response to a consultation on replacing the EU’s Solvency II regime with a
UK equivalent. The consultation response announced that the ‘risk margin’, a capital buffer that insurance companies must hold,
will be cut by 65.0% for life insurers and 30.0% for general insurers; that life insurers will be able to use a broader range of assets
to match their liabilities, including renewable energy projects; that the threshold at which the Solvency UK regime will apply will
triple to GBP15.0mn in annual gross written provisions and double to GBP50.0mn in gross technical provisions, with positive
implications for the insurtech sector; but that the existing methodology for calculating the ‘matching adjustment’ benefit will be
largely maintained. The proposed reforms will free up billions of pounds of capital on insurers’ balance sheets for investment in
British infrastructure projects: in January 2023, City A.M. reported that Aviva could unlock an additional GBP25.0bn over the next
decade. The Chancellor Jeremy Hunt confirmed hat the reforms would be implemented in the coming months.
Life Insurance
Latest publicly available figures from the Association of British Insurers (ABI) show that as of October 2020 (latest available data)
there were 333 companies authorised to act in the life insurance sector in the UK, of which 145 are UK-based and 188 are
headquartered in Europe. This is a decline on previous years: in 2015 there were 435 life insurance providers active in the UK, of
which 195 were UK-based and 240 were headquartered overseas. Competition is intense and includes exploitation of access to
capital and economies of scale, innovation in terms of product design and distribution, leverage of platforms to distribute to advisers
and individual clients, and development of brand and cross-subsidy of the UK life insurance businesses by cash-generative foreign
life insurance operations and/or asset management businesses.
UNITED KINGDOM - TOP 10 LIFE INSURANCE COMPANIES BY GROSS PREMIUMS, USDMN (2015–2020)
2015 2016 2017 2018 2019 2020
Lloyds Banking Group 14,452.8 12,042.4 12,807.3 19,190.7 22,356.4 18,626.9
Legal & General 9,657.1 13,842.2 10,208.8 17,134.7 19,405.3 16,083.3
Aviva plc 8,253.1 7,369.4 8,844.5 9,742.1 11,386.9 13,164.1
Rothesay na 9,285.3 1,862.3 17,909.9 21,196.1 9,334.6
Pension Insurance Corporation (PIC) 5,736.8 3,507.8 4,767.2 9,539.3 9,172.3 7,242.3
Aegon NV 6,266.2 10,937.5 10,822.7 8,863.7 7,032.4 5,507.8
Phoenix Life na na na 2,392.2 4,214.7 4,398.7
Mobius Life na na na na 4,850.6 3,981.1
Just Retirement 1,679.0 3,533.5 2,383.6 2,832.4 2,452.0 2,753.6
Zurich Financial Services 3,905.0 2,568.6 2,584.1 3,008.2 2,675.2 2,546.0
Note: Data are latest available. na = not applicable/available. Source: Association of British Insurers (ABI), Fitch Solutions
Several of the largest players, including Aviva and Legal & General, are long-established UK life (or, in the case of Aviva, composite)
insurers that have developed over decades, often by way of mergers and acquisitions (M&A). These companies are all multinationals,
despite their different geographic footprints, and have ample access to capital. However, the life insurance operation of Lloyds
Banking Group has claimed the top spot of the life sector in recent years.
A series of acquisitions means that Phoenix Group is one of the key players in the life segment. It operates as a specialist
consolidator of heritage life assurance funds and now has some 13.0mn policyholders and GBP270.0bn of assets under
administration. In 2020, Phoenix acquired ReAssure from Swiss Re, which followed the acquisition of Standard Life Aberdeen's
life portfolio Standard Life Assurance Limited in 2018. In 2019, Phoenix Group joined the FTSE 100 index.
The second tier of life insurers is dominated by the UK businesses of major multinational groups. These
include Aegon (Netherlands), Zurich Insurance Group (Switzerland) and Swiss Re. Many of these groups focus on particular,
profitable, market niches. There has been some M&A activity in the market over recent years, with AIG acquiring Ellipse from
Munich Re in June 2018; in 2019, Generali sold its life insurance run-off portfolio in the UK to Reinsurance Group of America.
Over the years, the market shares of particular companies have varied markedly. All the players focus on profitability and/or new
business premiums as their key performance indicators, rather than gross written premiums. The strengths of the entrenched
players are such that there are significant, if not insurmountable, barriers to entry. It is possible that the competitive landscape will
be shaped by further major transactions.
Non-Life Insurance
As is the case in the life insurance segment, the UK's non-life insurance segment is fragmented. The ABI notes that as of October
2020 (latest available data) there were a total of 920 general insurers in the market: this included 243 UK-based companies
authorised to write some form of general insurance, as well as 677 companies headquartered in Europe. This figure indicates the
consolidation that has taken place in recent years. In 2015, there were 934 general insurance companies authorised to operate in
the UK. These included 340 UK-authorised businesses and 563 that were headquartered in another EU member market, but which
passported into the market under the EU Third Non-Life Directive. The UK's departure from the EU means that passporting
arrangements no longer apply, and negotiations are still ongoing concerning the terms of market access.
The ABI identifies a number of major non-life insurance lines for households. These can be broadly divided into motor, accident and
sickness, fire and damage to property, marine, aviation and railway rolling stock, general liability, credit and suretyship, and a catch-all
'other' category. Across these segments, there is an enormous variety of products available to consumers, ranging in scale from the
most basic affordable covers through to highly complex and costly comprehensive covers. High levels of competition mean that
product innovation is a near-constant process.
Property And General Liability Dominate

United Kingdom - Non-Life Premiums Written By Sub-Sector, USDmn (2023)
Source: OECD, Fitch Solutions
The largest two non-life insurers are both UK-based multinationals. As of 2020, listed composite insurer Aviva is the largest provider
of non-life insurance and offers cover including motor, home and pet, followed by RSA Group. Direct Line, another UK-listed
player which specialises in direct sales of motor and other covers to households. It is one of the few major providers in the UK not to
have an international presence.
Some of the largest providers are multinationals headquartered overseas, including France-based multinational composite
giant AXA (which focusses on the health, property and casualty segments in the UK) and Zurich Insurance. Other majors include
the UK subsidiaries of Belgium-based Ageas, Bupa (in health insurance) and AIG. Allianz is another key provider. The group has
expanded its market share in recent years by acquiring Legal & General Insurance (from Legal & General Group) for a reported
GBP242.0mn, as well as increasing its share in LV General Insurance Group to 100.0%, having acquired the remaining 51.0% of
shares from Liverpool Victoria Friendly Society in a sale valued at GBP578.0mn. Allianz reported that it will merge the two
acquisitions, which should position the insurer as the second largest general insurer in the UK.
UNITED KINGDOM - TOP 10 NON-LIFE INSURANCE COMPANIES BY GROSS PREMIUMS, USDMN (2015–2020)
2015 2016 2017 2018 2019 2020
Aviva 6,879.6 6,413.4 5,605.1 6,009.1 6,466.3 6,475.6
RSA Group 10,477.5 9,748.4 9,780.2 9,962.2 9,523.3 5,112.8
Allianz 3,300.0 2,995.0 2,887.1 2,719.2 2,541.0 5,028.0
Direct Line 4,816.2 4,420.7 4,365.8 4,285.2 4,079.6 4,077.4
Zurich Insurance 3,887.1 3,467.5 3,315.3 3,183.3 3,165.5 3,515.4
AXA 3,272.7 3,073.0 2,910.0 2,992.5 2,952.3 2,900.0
AIG 7,315.6 6,614.3 5,044.8 5,052.5 2,721.7 2,884.2
BUPA 3,538.5 3,212.1 3,068.1 3,179.2 2,972.5 2,766.8
NFU Mutual 2,024.3 1,860.4 1,693.7 1,754.4 2,103.5 2,185.9
Ageas 2,112.3 1,902.8 1,744.7 1,638.9 1,540.1 1,575.9
Note: Data are latest available. Source: ABI, Fitch Solutions
The rest of the market is fragmented, with a large number of insurers operating on a relatively small scale. As a result, conditions in
the non-life market are competitive. The leading companies compete on the basis of a number of strengths, including access to
capital, strong and long-established brands, innovation in terms of product, multi-channel distribution and cross-subsidies from/to
profitable overseas businesses. Although underwriting is consistently disciplined, many of the companies have to contend with
downwards pressure on prices, especially for basic household covers. Consequently, the industry is focused on cost efficiencies,
which provides impetus for M&A at the lower end of the market.
The UK's insurance market is one of the oldest and most highly developed in the world, both in terms of the absolute volume of
premiums written and the sophistication and scale of providers. Regulatory oversight is extensive, and the governing legislation is
expansive and, in many cases, highly complex. Changes to the regulatory system are ongoing in the wake of the global financial
crisis, focused primarily on improving capitalisation and solvency ratios.
The evolution of insurance market regulation can be traced back hundreds of years in the UK, based on the early provision of
marine insurance (with recorded cases from 1547 in the High Court of the Admiralty of England). Global best practice is still often
based upon UK laws, ensuing amendments and case law. The development of insurance market regulation was also aided by the
establishment of the world's oldest insurance market, Lloyds (formerly Lloyds of London), and the expansion and diversification
of the insurance sector through to the modern day.
As one of the oldest and largest insurance markets in the world, the UK is considered a global leader in terms of insurance
regulation and legislation. Many other markets globally base domestic legislation on UK law, and UK bodies such as the Prudential
Regulation Authority (PRA) and Financial Conduct Authority (FCA) play a pivotal role in the development of regional and global
regulations. As with the banking sector, regulation of the insurance industry has undergone an overhaul over recent years in
response to the 2008 global financial crisis, which had a substantial impact on insurance providers. While UK firms did not see a
collapse on the same scale as that of US-based AIG, collapsing investment portfolios and declining assets led to major structural
changes at many leading providers.
Following the introduction of the Financial Services (Banking Reform) Act 2013, regulatory oversight and supervision of the
insurance industry was passed from the Financial Services Authority to the PRA (part of the Bank of England (BoE)) and the FCA. The
primary focus of regulatory changes in relation to the insurance sector has been on enhancing capital levels and improving risk
assessment and management processes.
The Treasury leads government policy on the finance sector, including insurance. Responsibility for monetary stability sits with the
Financial Policy Committee (part of the BoE) and is guided by the PRA and the FCA. Since the financial crisis, the focus of
government policy has been on improving consumer protection by augmenting capital requirements in the industry and
enhancing the solvency ratios imposed on insurance providers.
The UK's former membership of the EU means that regulations still align with those in force in other member markets, and Brexit is
unlikely to result in dramatic changes to government policy relating to the insurance segment. The UK played an instrumental role
in the development of EU-wide legislation, and much of the legislation will remain in place in order to ensure continued access to
EU markets. That being said, in November 2022 the government released a response to its consultation on replacing Solvency II
with an equivalent UK regime. Proposed changes include easing solvency requirements by reducing the risk margin by 65.0% for
life insurers and 30.0% for general insurers, allowing insurers to reduce long-term liabilities by investing in ‘matching’ assets and
trebling the threshold for inclusion in the regulations.
Key Legislation
Insurance-related legislation in the UK is vast. Key recent pieces of legislation include:
• Financial Services (Banking Reform) Act 2013

• Insurance Act 2015
• Consumer Insurance (Disclosure and Representations) Act 2012
• BoE and Financial Services Act 2016
• Civil Liability Act 2018
The UK also implemented EU directives through national law, including the key Solvency II Framework Directive 2009/138/EC—as
amended by the Omnibus 2 Directive, and implemented through the Financial Services and Markets (Solvency II Regulations
2015)—the Insurance Distribution Directive (which covers consumer protection when buying insurance, and replaced the old
Insurance Mediation Directive from 2018) and the IORP Directive (encompassing rules for occupational pension funds).
Industry Regulators
The PRA, which sits under the BoE, is responsible for ensuring the stability of around 1,500 financial services firms, including banks,
building societies, credit unions, major investment firms and insurers. Its three statutory objectives are:
• the promotion of the safety and soundness of financial services firms under its remit
• protection for insurance policyholders
• the facilitation of effective competition
In the insurance sector the PRA assesses the soundness of insurance firms in order to ensure the protection of policyholders. The
PRA's supervisory initiatives encompass authorisations, capital requirements, systems of governance, data reporting, group-level
supervision and risk assessments. The PRA was also responsible for implementing EU directives such as Solvency II. Under Solvency
II, insurance firms are required to present to the PRA two key reports: The Solvency and Financial Condition Report (to be disclosed
publicly) and the Regulatory Supervisory Report (which is not disclosed publicly).
The FCA, which took over from the defunct Financial Services Authority, acts as the conduct regulator for approximately 50,000
financial services firms, including life and non-life insurance providers. The FCA is also a prudential supervisor for 48,000 of those
firms. The FCA is responsible for the implementation, supervision and enforcement of domestic legislation and international
standards, and is funded by fees charged to financial services firms. The FCA also provides authorisation for some firms/individuals
(the Financial Services Register provides a list of authorised firms/individuals both under the FCA and PRA). The FCA sets out
industry-accepted standards of conduct. For example, in the general insurance sector the FCA requires compliance with the
Insurance Conduct of Business Sourcebook. The FCA also regulates directives such as the Approved Persons Regime (Senior
Insurance Managers Regime).
The PRA has a range of actions at its disposal to enforce regulation, including investigating insurers, imposing reporting
requirements and assessing risks. As the body that authorises firms in the financial sector, the PRA can revoke or suspend
authorisation, impose requirements, investigate firms and individuals and impose financial penalties, restrictions or public censure.
The FCA also has the power to impose financial penalties and public censure.
There are numerous examples of the PRA and FCA taking enforcement action and imposing penalties. While many of the largest
fines have been imposed in the banking sector, insurers have also been subject to public censure and financial penalties.
As with the banking sector, insurers that wish to act in the UK market are subject to extensive operational requirements and require
authorisation from the PRA and FCA. Requirements for insurers are set out by the FCA (under Statements of Principle and Code of
Practice) and the PRA. These have been enhanced in recent years by the implementation of Solvency II and enhanced reporting
requirements for Non-Solvency II Firms.
The leading trade association for the insurance sector in the UK is the Association of British Insurers (ABI). As well as providing
consumer information, the ABI is a highly influential lobbyist on behalf of the insurance industry and frequently petitions
government, including protests against planned increases to the Insurance Premium Tax. The ABI helps to develop industry
standards of practice, and publishes industry data and reports, consultation papers and policy documents. The ABI has over 200
members, which together represent over 90.0% of the UK insurance market. It frequently works with the British Insurance Broker's
Association, which has just under 2,000 regulated firms representing more than 100,000 employees, and itself lobbies the
government on a range of issues.
The ABI is the voice of the UK's world-leading insurance and long-term savings industry. The main roles of the ABI include:
• getting the right people together to help inform public policy debates, engaging with politicians, policymakers and regulators at
home and abroad
• being the public voice of the sector, promoting the value of its products and highlighting its importance to the wider economy
• helping encourage consumer understanding of the sector's products and practices
• supporting a competitive insurance industry in the UK and overseas
Asset Management
Asset Management Snapshot
Key View: The UK’s asset management sector is one of the largest and most dynamic markets in the world. It boasts a broad range
of competing providers, from the world's largest fund managers to smaller local asset management companies. However, economic
uncertainty, high inflation and aggressive central bank monetary tightening will pose headwinds to the sector throughout Q223.
• In January 2023, it was reported that the world’s largest asset managers were being accused of obstructing shareholder votes on
environmental, social and governance (ESG) issues. Data from ShareAction showed that votes in favour of ESG resolutions grew
to 66.0% in 2022, from 60.0% in 2021, but this trend was driven by managers in Europe; support in the UK and the US remained
comparatively static. Average support in the UK fell from 65.0% in 2021 to 64.0% in 2022.
• In December 2022, the FT reported that the typical UK wealth management client will have seen their portfolio lose nearly 20.0%
of its value in the year to December 15 2022, in inflation-adjusted terms. Almost all asset classes other than energy and
commodities suffered losses, leaving few opportunities to avoid losses, whilst inflation and sell-offs in both stocks and bonds
‘hammered returns’. Although bond-heavy strategies have historically lost less during a market downturn, high inflation and the
prospect of further interest rate hikes caused many fixed income-dominated portfolios to perform worse than equity-heavy
options in 2022.
• Data released by the Investment Association show that funds under management increased by 2.7% m-o-m in November 2022
(latest available data), but they were down by 11.0% y-o-y. The m-o-m increase was sharpest for ISAs, where funds under
management increased by 4.6% m-o-m, while money markets funds under management saw a decrease of 10.9% m-o-m.
• Data from the IA show that net retail sales have contracted sharply in recent months, with cumulative year-to-November 2022
outflows of GBP25.5bn.
• In October 2022, The Guardian reported that London-based firms, including Jupiter, Schroders and St James's Place, had
suffered net outflows of funds as inflation, economic uncertainty and the Russia-Ukraine war weighed on investors' decisions,
with many withdrawing or diverting cash elsewhere.
• In September 2022, the UK Government announced a GBP45.0bn package of unfunded tax cuts - the ‘mini-Budget’- that sent
gilt yields soaring at unprecedent speed and scale, with 30-year yields rising from around 3% in the days before the mini-Budget
to 5.1%, their highest level in two decades. This created significant pressure in the UK’s 5,200 defined benefit (DB) pension
schemes. Liability-driven investing (LDI), as is widely used by DB pension schemes, uses derivatives to increase pension funds’
exposure to gilts while offering protection against moves in interest rates and inflation, which frees up cash for high-return
investments. The sharp decrease in gilt prices triggered calls for additional collateral from the pension funds, some of which were
forced into an asset fire sale in order to meet cash requests. The Bank of England intervened to buy gilts in order to prevent
liquidity issues becoming a systemic threat. The implications for asset allocation are still playing out, as pension fund leverage is
decreasing while desire for liquidity is increasing.
• In July 2022, it was reported that the Financial Conduct Authority (FCA) was not requiring Fundsmith, an investment
management firm with over GBP28.0bn in AuM, to take further action, following an independent review of its business activity.
The firm was served with a Section 166 notice under the Financial Services and Markets Act in April, and underwent a third-party
review into elements of its activity that were cause for concern or required further analysis, although it is still not clear what
triggered the review.
The UK is home to one of the largest asset management industries in the world, with more than 1,800 companies active in the
sector. Investment Association (IA) members, which are thought collectively to account for around 37% of European assets under
management (AuM), reported GBP10.0trn in total AuM by end-2022. The UK is a significant global player in the industry and
remains an attractive destination for both domestic and international investors, including both retail and institutional investors.
Passing control of funds to asset managers has become an established method of investment in the country; conventional savings
methods have seen returns limited by persistently low interest rates, whereas the asset management industry can enhance returns
at the cost of higher risk.
As one of the largest asset management markets globally, the UK is home to a wide range of investment management companies,
from small local providers through to the world's largest multinationals. The marketplace is fragmented and there is scope for
merger and acquisition (M&A) activity at all levels, particularly as downward pressure on fees means greater focus on areas of
potential cost savings.
Latest Developments
• In January 2023, Titan Asset Management Holdings and LEBC/Aspira Group announced a new strategic partnership,
allowing Titan to develop its investment proposition and manage the LEBC/Aspira model portfolio service investments. The
partnership is expected to enhance LEBC’s offering to clients and elevate Titan’s position in the market. Earlier in January, Titan
Wealth Holdings bought the IFA firm Telford Mann Group Limited, subject to regulatory approval. The acquisition, which is
expected to complete in January 2023, adds more than GBP700.0mn in AuM to Titan’s portfolio.
• In January 2023, it was reported that Jupiter Asset Management had outlined plans to merge, close or overhaul four funds
that month, as part of a ‘fund rationalising programme’ that will see around 25% of Jupiter’s funds merged, closed or
repositioned. Over the past twelve months, the company’s share price has fallen close to 37.0%.
• In January 2023, it was reported that the fund group Baillie Gifford, which manages GBP228.0bn for customers across its range
of funds, focusing on growth stocks, had lost more than USD14.0bn on Tesla and Shopify in 2022. Although the Tesla stock has
risen by nearly 2,000.0% since the company started investing a decade ago, it fell by 65.0% in 2022; Shopify shares fell by 74.8%.
Baillie Gifford is Tesla’s twelfth largest shareholder.
• In December 2022, the government passed a new rule allowing designated crypto-assets in the list of investment transactions,
qualifying them for Investment Management Exemption. This will remove the necessity for non-UK residents who use a UK-
based investment manager to pay UK tax on income from crypto-assets, thus removing fund managers’ disincentive to hold the
assets. The new rules will apply to transactions entered within the 2022/23 tax year, and came into effect on January 1 2023.
• The wealth management industry has seen substantial M&A activity recently. In March 2022, Aviva agreed to buy Succession
Wealth Management, and Royal Bank of Canada agreed to acquire Brewin Dolphin. These deals followed the purchase
of Charles Stanley by Raymond James in July 2021.
The asset management industry serves millions of people both in the UK and abroad, with around three-quarters of all UK
households using the services of an investment manager directly or indirectly. Around 40% of total AuM are from pension schemes,
with more than 10.0mn individuals saving for a pension through auto-enrolment; even more use other investment products. This
includes over 9.0mn people saving for their retirement through defined contribution pension schemes and around 1.4mn savers
currently building up pensions in defined benefit pension schemes. There are also around 11.0mn savers with investment products,
such as stocks and shares individual savings accounts. Asset management companies constitute around 1% of UK GDP, and the
UK's asset management sector represents 7.0% of the global total. The industry is a significant exporter for the UK, representing
3.5% of total net services exports in 2022.
The two primary activities of asset management companies are passive and active investment. Active investment involves the asset
manager making real-time decisions on where to invest a client's money, both in terms of the companies to invest in and the
amounts to allocate. This is regarded as a higher-risk and higher-reward strategy, with decisions based on the manager's
expectations on the performance of stocks. It also requires greater fees for the more hands-on activity of the manager. Passive
investments are simpler, usually tracking a particular benchmark or index. Being less exposed to the performance of particular
companies makes these investments lower-risk, but also provides lower rewards. In the UK, passive investment uptake has
increased in recent years, with more individuals seeking to invest and earn a competitive return in a low-interest-rate environment,
where traditional banking and savings products offered low returns, although this may reverse as monetary policy is normalised.
Much passive investment in the UK is done through funds, where a number of individuals group together to invest money in a
single portfolio of stocks, reducing costs. The passive sector presents a threat to traditional asset management practices as it
requires less hands-on management and fewer risks, reducing the potential for returns for companies operating in the sector.
UNITED KINGDOM - FUNDS UNDER MANAGEMENT BY TYPE, GBPBN (NOVEMBER 2021–NOVEMBER 2022)
Total Equity Fixed Income Money Market Mixed Asset Property ISA Other
Nov. 2021 1,564.7 927.0 322.2 46.9 286.6 27.2 186.4 136.9
Dec. 2021 1,590.3 948.7 322.6 47.0 290.0 28.0 190.8 138.6
Jan. 2022 1,558.9 917.2 331.6 47.2 278.9 27.2 182.7 135.1
Feb. 2022 1,495.6 875.8 308.0 50.5 274.9 26.9 178.7 134.8
Mar. 2022 1,524.4 902.4 302.8 51.5 279.7 27.7 183.5 140.1
Apr. 2022 1,486.0 879.2 295.6 47.3 273.7 27.5 180.7 138.2
May 2022 1,462.0 867.3 291.4 45.3 270.5 26.7 179.5 135.3
Jun. 2022 1,380.2 812.4 278.7 44.6 255.0 25.0 178.2 128.5
Jul. 2022 1,428.4 845.4 285.9 44.6 263.4 25.7 178.1 133.3
Aug. 2022 1,416.9 841.6 279.6 44.3 261.5 25.6 176.3 133.0
Sep. 2022 1,330.7 784.3 260.4 45.8 248.0 23.1 165.0 128.6
Oct. 2022 1,356.6 792.2 266.2 62.6 250.0 22.3 167.0 123.8
Nov. 2022 1,393.2 822.1 273.8 55.8 256.7 21.9 174.7 128.7
Source: Investment Association (IA), Fitch Solutions
Asset management companies in the UK were left largely unscathed by the 2009 global financial crisis. However, they have had to
reassess their marketing initiatives in response to the widespread mistrust of financial services companies since the crisis. This has
led to numerous product differentiation strategies. The market is competitive, consisting of a mixture of pure-focus asset
management firms and offshoots of banking or insurance groups. Such standalone companies have increased in prominence in
the last decade, as banking groups have trimmed down non-core operations in the aftermath of the global financial crisis. The
leading players in the asset management market in terms of funds under management include a number of large and well-
established companies with long experience of operating in the industry. However, given the sheer scale of the UK's asset
management industry, there is also a significant number of smaller players. This provides a great deal of fluidity and competition in
the market, particularly among companies with lower levels of AuM. Consolidation will remain a key trend in the coming years.
UNITED KINGDOM - TOP 20 ASSET MANAGEMENT COMPANIES BY TOTAL UK-DOMICILED FUNDS UNDER
MANAGEMENT, GBP
Company Total Funds Under Management
BlackRock Investment Management (UK) 87,585,200,363
Link Fund Solutions 77,349,634,630
Royal London Unit Trust Managers Ltd 58,638,626,943
abrdn Fund Managers Limited 58,288,593,965
Legal & General Investment Management Limited 54,785,801,924
Fidelity Worldwide Investment 54,353,699,872
Vanguard Investments UK Limited 48,989,340,172
Baillie Gifford & Co Limited 46,219,719,113
HSBC Global Asset Management (UK) Limited 37,715,192,993
Scottish Widows Unit Trusts Managers 36,706,599,143
Schroder Unit Trusts Limited 32,348,376,229
Jupiter Unit Trust Managers Limited 29,833,029,289
BNY Mellon Fund Managers Limited 26,845,554,098
Liontrust Fund Partners LLP 26,010,961,497
Threadneedle Investment Services Ltd 25,593,282,063
M&G Securities Limited 25,208,215,694
Janus Henderson Investors 24,390,180,747
Fundsmith 24,132,200,367
J.P. Morgan Asset Management 23,896,401,599
Invesco 22,911,324,414
Note: Latest data as of August 2022. Source: IA, Fitch Solutions
According to figures from the IA, the largest player in the UK asset management market is the subsidiary of US-based BlackRock
Investment Management, with UK-domiciled funds under management of GBP87.6bn as of August 2022. This makes the
company the largest foreign-owned player in the UK market; the subsidiary is able to leverage its parent company's size.
Independent asset manager Link Fund Solutions is the second largest fund manager by total UK-domiciled funds under
management, followed by Royal London Unit Trust Managers, abrdn Fund Managers, Legal & General Investment
Management, Fidelity Worldwide Investment and Vanguard Investments UK.
As with the banking and insurance sectors, asset management in the UK is subject to expansive regulatory requirements. The sector
has seen a series of regulatory reforms over recent years, with a focus on adequate management procedures aimed at improving
individual accountability. Further changes are likely in light of Financial Conduct Authority (FCA) reviews of the market and potential
post-Brexit changes.
A broad range of asset and investment managers is active in the UK, numbering over 1,800 authorised firms. These vary in scale
from small local firms through to multinational providers with some of the largest volumes of assets under management globally. As
a diverse sector, the regulatory system is understandably complex. Oversight was tightened after the global financial crisis as the
focus shifted from maximising returns to improving market stability and reducing risk exposure.
As in the banking and insurance sectors, government policy is led by the Treasury through the Bank of England, via the Monetary
Policy Committee and the Financial Policy Committee. The Prudential Regulation Authority (PRA) and the FCA also play key roles in
developing relevant policy. While asset managers survived the financial crisis relatively unscathed, government scrutiny of the sector
has increased over recent years, particularly in terms of exposure to risk, competitiveness and management practices; addressing
these issues is a priority of government policies.
In recent years, much of the incoming legislation related to asset management has been directed by the EU in order to standardise
best practice across the region. While Brexit will likely result in some legislative changes, in order to ensure that UK-based firms can
continue to compete on a global basis, it is unlikely that any of the new regulatory measures introduced will be rolled back to a
significant extent.
Broadly speaking, the UK's system of banking regulation and oversight, including for asset and investment managers, is among the
most rigorous globally, particularly in light of regulatory changes enacted since 2008.
However, room for improvement remains. The FCA noted in a November 2016 Asset Management Market Study that a number of
areas needed to be strengthened, including competition in the market, pricing structures and weak cost controls. In April 2017 the
FCA reiterated these objectives in its Mission Statement and Business Plan 2017/18, outlining its focus on transparency and
payments, as well as market stability. In April 2018, the FCA revealed a package of strict new rules for asset managers. The focus of
the new rules is on the duties of fund managers as the agents of investors in their funds, and on improving the information that
investors receive about funds. Firms operating in the UK asset management industry had 18 months to implement the rules on
assessment of value and appointment of independent directors, and 12 months for the rules relating to the way in which fund
managers profit from investors buying and selling their funds.
In April 2019, the FCA published its second set of rules following its Asset Management Market Study. The new rules and guidance
set out how fund managers should describe fund objectives and investment policies to make them more useful to investors; require
fund managers to explain why or how their funds use particular benchmarks, or if they do not use a benchmark, how investors
should assess the performance of a fund; require fund managers who use benchmarks to reference them consistently across the
fund's documents; require fund managers who present a fund's past performance to do so against each benchmark used as a
constraint on portfolio construction or as a performance target; and clarify that where a performance fee is specified in the
prospectus, it must be calculated based on the scheme's performance after the deduction of all other fees.
Key Legislation
As well as relevant banking legislation, the asset management segment is subject to various UK- and EU-based legislation including:

• Markets in Financial Instruments Directive (MiFID) and later amendments, with MiFID II taking effect from January 3 2018
• Markets in Financial Instruments Regulation
• Capital Requirements Directive (2013/36/EU)
• Capital Requirements Regulation (575/2013)
• Undertakings for Collective Investment in Transferable Securities framework
• Alternative Investment Fund Managers Directive.
Industry Regulators
Most asset management firms in the UK fall solely under the regulatory oversight of the FCA. However, the largest firms also fall
under the PRA and require authorisation from both. Additional oversight stems from industry bodies such as the Competition and
Markets Authority.
As in the banking sector, the PRA and FCA can take a variety of actions to ensure oversight of the asset management sector. As well
as reporting requirements, the PRA and FCA can suspend or withdraw authorisation, apply fines and penalties, public censures and
even issue wind-up orders.
There are numerous examples of the PRA and FCA taking enforcement action and imposing penalties against asset management
firms and individuals in the UK, including a number of fines handed out in 2019 for shortcomings under competition law in the
asset management sector.
Asset managers in the UK are represented by several industry associations. The Investment Association (IA) is the trade body that
represents 250 member investment managers, who collectively manage over GBP10.0trn on behalf of clients both in the UK and
globally. The IA actively lobbies on behalf of the asset management industry and is influential in the shaping of UK policy. It also sets
out its own conduct guidelines for members.
As well as the IA, two leading UK trade associations in the investment management and financial advice sector, namely the
Association of Professional Financial Advisers and the Wealth Management Association, merged in June 2017 to create the Personal
Investment Management and Financial Advice Association (PIMFA).
PIMFA has set out its objectives as representing the investment and financial advice industry, conducting research and policy work,
working with regulators to maintain the UK's role as a global financial hub, promoting a savings and investment culture in the UK,
facilitating dialogue between stakeholders, and developing industry best-practice guidelines.
Stock Exchanges
Stock Exchanges Snapshot
Key View: The UK is home to one of the world's largest stock exchanges, the London Stock Exchange (LSE), as well as several
smaller markets that ensure high levels of market liquidity and access to capital. The LSE is one of the oldest markets in existence,
with extensive and diverse product offerings; the market is also home to listings of some of the largest companies globally.
• The London Stock Exchange is one of the world's largest stock exchanges, with 1,106 company listings on the Main Market and
816 listings on the Alternative Investment Market (AIM) as of the end of December 2022.
• The FTSE 100 index ended 2022 on a modest annual gain, closing at 7,452 points, 0.9% higher than at the year’s start. Although
this was only a modest gain, the FTSE was one of the few indices to achieve a rise in 2022, with soaring inflation, interest rate
rises and recessionary fears causing the pan-European Stoxx 600 index to fall by 12.4% y-o-y, Germany’s DAX by 12.3% and
France’s CAC index by 9.5%. The FTSE 250, which is more UK-focused that the outward-looking FTSE 100, fell by 19.7% y-o-y. In
the first month of January 2023, the FTSE 100 rallied further, touching 7,864.95 on January 13, less than 0.5% away from its
record intraday high of 7,903 points in May 2018.
• In November 2022, Paris’s CAC All Shares index overtook London’s FTSE All-Share index, thus making Paris Europe’s largest stock
market by value thanks to demand for its luxury-retailer blue-chip stocks. Additionally, London has been overtaken by
Amsterdam in terms of market activity, falling into second place among European bourses for average daily volume traded.
Reuters reported that London has been undermined by the discount at which the FTSE All-Share index trades relative to world
stocks, which since the EU referendum in 2016 has grown to almost its largest since 1990, at 35.0% on a price-to-earnings
metric. However, London remains a much larger destination in terms of the number and volume of initial public offerings (IPOs),
with 55 new issues raising GBP1.5bn in 2022, much higher than either Amsterdam or Paris; UK companies also paid out seven
times more in dividends in Q322 than the total paid in France.
The London Stock Exchange (LSE) is one of the world's largest stock exchanges outside the US, hosting trading for some of the
largest companies in the UK and around the world. The exchange is the primary European stock market, and London remains one
of the major global locations for the trading of bonds, currencies and derivatives and will continue to hold a region-leading position
in the market. However, uncertainty regarding the terms of the UK's relationship with the EU over the medium term is a threat to
London's regional prominence.
The UK is host to the London Stock Exchange Group, which is Europe’s second largest stock market by value. The group traces
its origins back more than 300 years to 1698 and currently operates the London Stock Exchange, the Milan Stock Exchange (Borsa
Italiana), the MTS fixed-income market and the Turquoise multilateral trading facility. The LSE competes primarily with European
rivals such as Euronext, which has bases in Amsterdam, Paris, Brussels and Lisbon, and the Frankfurt Stock Exchange, operated
by Deutsche Börse.
Latest Developments
• In January 2023, the FT reported that the UK government was lobbying SoftBank to list Arm, a chip designing company owned
by the Japanese firm, on the London Stock Exchange rather than in New York. Plans drawn up by British officials and stock
exchanges in 2022 would have seen the company float simultaneously in London and New York, but political instability and
deteriorating market conditions derailed this attempt. Arm would be the largest tech group on the LSE if it were to list in the UK.
• The UK government has been attempting a series of reforms to London’s listings regime in order to make London a credible
alternative to New York for tech companies looking to go public and transform the UK into a tech hub. However, in January 2023,
the Times reported that the UK government’s ambitions had suffered another blow from Ascential’s decision to spin off its
digital arm into a standalone company listed in New York. The information and events group is currently part of the FTSE 250, but
this breakup will see the events business remain in London while leaving its digital commerce division free to seek new capital in
New York. Investors welcomed the decision, with the company’s share price up by 26.0% following the announcement.
• On December 13 2022, the life science research tool specialist Abcam delisted from the LSE’s AIM, in favour of a listing in New
York. The company had previously been the largest by market capitalisation listed on the board. As announced in July, the FT
speculated that it indicated the difficulties faced by the UK market in attracting and retaining companies post-Brexit and in the
face of increasing competition from Europe and the US; the UK government had been promoting the idea of a ‘golden triangle’
of Cambridge, Oxford and London as a global centre for life sciences investment to compete with Boston and San Francisco.
The LSE has two primary markets for company trading: the Primary Listed Main Market and the AIM. The Main Market is the
exchange's primary market for the trading of equities and hosts a plethora of companies. Most are UK-based, but there is a
significant number of international companies who are also listed on the Main Market.
The market also benefits from a strong and well-established regulatory framework. The LSE's primary equity index is the FTSE 100.
The index includes the top 100 UK-incorporated companies listed on the LSE, and the market cap of the FTSE 100 companies
represents around 83% of the market cap of FTSE all-shares. The index now has 100 constituents, as opposed to 101 previously, as
both A-class and B-class shares listed for Shell (previously Royal Dutch Shell) were combined into a single share line in January
2022. The FTSE 100 is dominated by the top 10 companies listed, which represent around two-fifths of the index (which is weighted
by market capitalisation). The FTSE 250 is the secondary equity index and includes the 250 largest companies listed on the LSE that
are not included in the FTSE 100. The index includes mainly domestically focused companies, meaning that the FTSE 250 is widely
regarded as a more representative index of the performance of the UK economy.
UNITED KINGDOM - TOP 10 COMPANIES BY MARKET CAPITALISATION ON THE LSE MAIN MARKET
Company Name Industry Market Cap, GBPmn
AstraZeneca Healthcare 167,553.40
Shell Energy 162,757.90
HSBC Holdings Financials 119,510.50
Unilever Consumer staples 102,689.90
BP Energy 85,930.20
Diageo Consumer staples 93,279.20
Rio Tinto Basic materials 79,178.10
Glencore Basic materials 71,190.20
British American Tobacco Consumer staples 68,462.30
GlaxoSmithKline Healthcare 57,466.50
Note: Latest data as of January 26 2023. Source: LSE Group, Fitch Solutions
The Main Market is dominated by financial services companies, indicating the importance of the industry to the UK's corporate
landscape. Almost half of the companies listed on the Main Market fall into this sector, though market capitalisation represents only
around a quarter of the total. Other major segments include the energy sector (Shell and BP are among the top 10), the industrial
sector and consumer discretionary. Bioresearch company AstraZeneca features after seeing its value surge through the
development and distribution of a Covid-19 vaccine.
UNITED KINGDOM - COMPANIES ON LONDON STOCK EXCHANGE MAIN MARKET BY VALUE RANGE
Market Value Range, GBP Number Of Companies %
Over 50.0bn 17 1.5
10.0–50.0bn 43 3.9
5.0–10.0bn 40 3.6
2.0–5.0bn 85 7.7
1.0–2.0bn 155 14
500.0–1,000.0mn 76 6.9
250.0–500.0mn 147 13.3
100.0–250.0mn 166 15
Market Value Range, GBP Number Of Companies %
25.0–100.0mn 120 10.8
0–25.0mn 268 24.2
Total 1,106 100
Note: Latest data as of December 31 2022. Source: LSE Group, Fitch Solutions
AIM is the LSE's market for small- and medium-sized enterprises (SMEs). It is smaller than the Main Market in terms of number of
companies listed, and its market capitalisation is significantly lower because of the smaller size of organisations included. AIM
originated from the desire for smaller companies to float shares in a less regulated and more flexible environment, where they could
more easily attract investment. Established in June 1995 with only 10 companies and a market capitalisation of GBP82.2mn, the
market now includes 816 companies and had a market capitalisation of GBP93.2bn as of end-2022.
UNITED KINGDOM - TOP 10 COMPANIES BY MARKET CAPITALISATION ON THE LONDON STOCK EXCHANGE AIM
MARKET
Company Name Industry Market Cap, GBPmn
HUTCHMED (China (Mainland)) Healthcare 2,551.10
Jet2 Consumer discretionary 2,527.90
Keywords Studios Consumer discretionary 2,166.20
Burford Capital Financials 1,604.40
RWS Holdings Industrials 1,506.50
Global Data Computer services 1,496.50
CVS Group Healthcare 1,369.10
Fevertree Drinks Consumer staples 1,302.00
Emis Group Enterprise systems (healthcare) 1,189.00
Gamma Communications Telecoms 1,142.80
Note: Latest data as of January 26 2023. Source: LSE Group, Fitch Solutions
Overall, the market is characterised by a greater spread of companies than the Main Market. While industrials remain the most
dominant category in terms of total companies listed, six other sectors also have more than 50 companies on AIM. Two of those
sectors, healthcare and technology, are indicative of the greater focus on innovative industries within AIM; there are five times as
many technology companies listed on the AIM compared with the Main Market. Hutchmed, a Mainland Chinese biotech firm, has
the highest market capitalisation as of end-January 2022, ahead of Jet2, a low-cost airline.
Additional Smaller Markets
While the LSE is by far the largest exchange in the UK, there are a number of smaller exchanges that have active operations. The
most prominent of these is Euronext, which operates a London-based exchange in addition to its more prominent locations on the
continent, in Paris, Amsterdam, Lisbon and Brussels. Euronext is owned by the Intercontinental Exchange, after a USD8.3bn deal
with the New York Stock Exchange Group was agreed in 2012 and approved by regulators in 2013. The London Exchange was
launched in 2012 and was approved as a recognised investment exchange (RIE) by the Financial Conduct Authority (FCA) in June
2014, giving it regulatory approval to begin operations. However, on May 28 2020 Euronext announced the stoppage of RIE
activities from June 30 2020 following an application to the FCA to revoke its licence.
According to the UK Literacy Association, other RIEs with active listings of securities are the NEX Exchange and BATS Trading. Until
2017, the NEX Exchange was named the ICAP Securities and Derivatives Exchange, and it maintains the ISDX acronym at present in
official documentation with the UKLA. As of February 2019, securities of three companies are traded on the Main Board of the
exchange: ICAP, Mears Group and NEX Group Holdings. Founded in 2005, it was known as Plus Markets until 2012 when it was
acquired by ICAP. It received RIE status in 2007.
BATS Europe is a subsidiary of US-based BATS Global Markets, which in February 2017 was acquired by CBOE Holdings for
USD3.2bn. The exchange received RIE approval in May 2013 following the 2011 merger of BATS Trading and Chi-X Europe.
Authorised persons can carry out various regulated activities on the London Stock Exchange (LSE), subject to regulatory oversight
from the Financial Conduct Authority (FCA). Legislation regarding management and competency requirements has been updated
in line with EU directives, particularly the Markets in Financial Instruments Directive (MiFID) II; however, there is some uncertainty
regarding the future of regulatory compliance and compatibility with EU standards post-Brexit.
The LSE was deregulated in the 1980s (the 'Big Bang' reforms), which saw trading shift from the physical floor of the stock exchange
to electronic and telephone trading. The LSE is owned by the London Stock Exchange Group, which also owns the Italian
exchange (Borsa Italiana), secondary markets such as Turquoise and various derivatives markets. The LSE operates numerous
indexes via the FTSE Group, including the FTSE 100, FTSE 250 and the FTSE SmallCap. While the LSE has dropped behind other
markets (such as the New York Stock Exchange) in terms of overall size, the market remains one of the largest and most active
globally.
Oversight of brokers trading on the stock exchange was overhauled in the wake of the 2009 global financial crisis, and the previous
pattern of deregulation is gradually being reversed. In 2014, the UK government (via HM Treasury, the Bank of England (BoE) and the
FCA), conducted the Fair and Effective Markets Review to examine the effectiveness of the country's Fixed Income, Currency and
Commodities (FICC) markets, the final results and recommendations of which were published in June 2015. The result of this review
was a focus on increasing individual accountability in the market, improving market standards of practice, widening regulatory
perimeters and expanding international cooperation.
The UK government's decision to improve regulation and oversight of brokers is unlikely to be affected by exit from the EU: in order
for UK-based companies to continue trading on foreign exchanges, regulatory standards based on regional directives (and indeed
global initiatives) will need to be implemented and upheld. At this stage, it is still unclear what impact Brexit will have on the
European Commission's planned establishment of a Capital Markets Union, which would implement a rule book for all covered
capital markets. We also note that pushback against the cost of regulatory compliance could result in changes to market legislation
post-Brexit.
As in the banking sector, the UK is considered a world leader in terms of the development of financial market regulation, including
oversight of the stock exchange and brokers. The Prudential Regulation Authority and FCA frequently partner international
organisations to determine globally recognised standards of conduct. That said, the regulatory system governing traders remains
less expansive and transparent than other financial services sectors.
Key Legislation
As well as relevant banking legislation, brokers are subject to UK legislation/directives, including the following:
• MiFID and later amendments with MiFID II in effect from January 3 2018
• Income Tax Act 2007 (for recognition of stock exchanges)
• BoE and Financial Services Act 2016
• Undertakings for Collective Investment in Transferable Securities (UCITS) and the UCITS V Directive
• Alternative Investment Fund Managers Directive
MiFID is an EU directive that regulates the provision of financial instruments and related services for companies to their clients,
including shares, bonds and derivatives. It was implemented in the UK in November 2007, followed by the revised MiFID II in January
2018, with changes reflecting the new financial services environment following the 2009 global financial crisis and emphasis on
providing a greater degree of protection for investors.
Stock exchanges looking to operate in the UK must be approved by the FCA as a recognised investment exchange under the
Financial Services and Markets Act 2000. This law also covers other investment exchanges active in the trading of securities, fixed
income, currencies and commodities.
Industry Regulators
Brokers are subject to regulatory oversight from the FCA, and the LSE sets out its requirements in the Rules of the LSE. The BoE also
sets out a Code of Guidance under the Securities Borrowing and Lending Code of Guidance and the Gilt Repo Code of Guidance.
The FCA's capacity to act against individuals and firms that do not meet regulatory requirements has been strengthened in recent
years, and the FCA can now impose fines, suspensions and public censures of brokers. There are numerous examples of the FCA
issuing fines to brokers who are deemed to have fallen short of regulatory requirements, with fines reaching into millions of pounds.
This includes a number of investigations for non-compliance which have taken place following the introduction of MiFID II, some of
which have resulted in large fines, such as Goldman Sachs' GBP34.3mn fine for insufficient transaction reporting levied in March
2019.
In order to become authorised by the FCA (direct authorisation or appointed representative status), applicants must abide by the
Statements of Principle and Code of Practice. Applicants must also meet the FCA's Fit and Proper Test as set out in the FCA
Handbook.
While not a trade association, the FICC Market Standards Board (FMSB) represents member interests in the industry and develops
voluntary conduct standards and guidelines. The FMSB was established in 2015 in response to criticism of market conduct in the
wake of the financial crisis (and reviews such as the Fair and Effective Markets Review noted above).
Industry Associations
The banking industry is represented by UK Finance, which integrated former industry association the British Bankers Association. UK
Finance also incorporates the Asset Based Finance Association, the Council of Mortgage Lenders, Financial Fraud Action UK,
Payments UK and the UK Cards Association. It reports having more than 300 members that provide a range of credit banking,
market and payment services.
Macroeconomic Overview
Subdued Outlook For The UK Economy, But Scope For Some Near-Term
Positive Surprises
Key View
• At Fitch Solutions, we continue to expect that the UK’s post-pandemic rebound will come to an end in 2023, with real GDP
expected to contract by 0.7% after an estimated 4.2% expansion in 2022.
• Driving the downturn will be the BoE’s aggressive policy tightening, which we expect will have particularly negative
consequences in an economy as rate sensitive as the UK.
• Persistent cost of living issues and a government that is reluctant to further loosen fiscal policy will act as further headwinds to
growth in the coming quarters.
At Fitch Solutions, we continue to expect that the UK’s post-pandemic rebound will come to an end in 2023, with real
GDP set to contract by 0.7% after an estimated 4.2% expansion in 2022. Driving the downturn will be the Bank of England
(BoE)’s aggressive policy tightening, which has seen bank rate rise from a low of 0.10% to its current 3.50% in just one year. We see
bank rate peaking at 4.00% at some point early in Q123. UK economic activity is particularly sensitive to shifts in interest rates owing
to 1) high levels of public and private sector debt; 2) an unfavourable maturity profile (particularly for households); and 3) a decade-
long house price bubble that was underpinned by low interest rates. The impact from the bank’s tightening will be compounded by
an ongoing cost of living crisis linked in part to Europe’s energy woes, while a perceived lack of headroom will dissuade the UK
government from further loosening fiscal policy to counteract these headwinds.
UK Underperformance Set To Continue

United Kingdom - Real GDP, % chg (LHC) & GDP, % chg vs Q419
Source: Macrobond, Fitch Solutions
These trends will see the UK – which is one of only two members of the G7 to have failed to reattain its pre-pandemic level of real
GDP – continue to rank as a significant underperformer in the coming quarters. The economy contracted by 0.3% q-o-q in Q322,
leading some to speculate that the UK is already in recession. We note, however, that the decline was largely driven by a sharp 0.6%
m-o-m fall in output in September 2022 that was a function of additional bank holidays linked to the Queen’s death. Activity
rebounded in October 2022 on the back of favourable base effects, while high frequency indicators suggest that growth did not
turn down further over what was left of Q422. That being said, this resilience is unlikely to persist for long into 2023, with the UK set
to enter recession in the early part of 2023 as the lagged impact from policy tightening begins to feed through.
United Kingdom Economy Stagnating, But Activity Has Not Yet Dropped Off A Cliff
UK - Monthly GDP, 2019 = 100 (LHC) & S&P / CIPS PMIs, balance of responses
Note: PMI reading below 50 denotes contraction. Source: Macrobond, Fitch Solutions
Households will certainly continue to feel the squeeze in the coming months, which we believe will translate into a
0.7% contraction in consumer spending over the course of 2023. As we have previously flagged, roughly one-third of
mortgage holders in the UK are either due to re-fix in 2023 or are already on variable rate deals. For the average borrower, this will
translate into an increase in repayments of roughly GBP300 per month (15% of median household disposable incomes). Granted,
only one-third of households are mortgage holders, though we note that negative wealth effects will still act to depress
consumption as house prices are repriced to reflect higher interest rates. While the decline in property prices should eventually put
downward pressure on rents, for now a still tight supply picture is allowing landlords to pass on the rise in borrowing costs to
tenants.
House Price Slide Will Pick Up Pace As Distressed Sellers Emerge

United Kingdom - Nationwide House Prices, % chg (LHC) & Number Of Outstanding Mortgages With Fixed Rate Expiring By End
2023 (RHC)
Source: Bank of England, Macrobond, Fitch Solutions
In addition to the UK’s property market woes, households will also have to contend with the ongoing cost of living
crisis. Real wage growth is currently running at around -3.0% y-o-y, which to a large extent reflects a surge in energy prices that has
only been partially mitigated by the rollout of government support measures. Granted, inflation should decelerate relatively rapidly
over the course of 2023 as base effects kick in, but we suspect that the boost to consumer spending will be more than offset by a
softening of the labour market. The unemployment rate has edged up for two straight months now from 3.5% to 3.7%, while
leading indicators - such as measures of vacancies and hiring intentions - have all clearly turned over.
Labour Market Tight, But Peak Tightness Likely Reached Already

United Kingdom - Unemployment & Vacancy Rates, % (LHC) & CIPD Employment Expectations, balance of responses & Decision
Makers' Panel Expectations For Annual Employment Growth, % chg y-o-y (RHC)
Source: Bank of England, Macrobond, Fitch Solutions
Finally, high interest rates should see households continue to refrain from the use of consumer credit to maintain existing levels of
expenditure. The personal savings rate actually rose in Q322, which we suspect may reflect the beginning of a trend. This tallies with
other survey data suggesting that UK households have cut back on discretionary expenditure in response to the cost of living crisis.
Rise In Savings Rate Consistent With Message From Survey Data

United Kingdom - Household Savings Ratio, % (LHC) & Actions Taken In Response To Cost of Living Crisis, % of respondents
Source: ONS, Fitch Solutions
Unsurprisingly, tight financial conditions and a weak outlook for growth will weigh heavily on fixed investment,
which we anticipate will decline by 2.0% in 2023. The situation is somewhat reminiscent of the situation in the early 1990s,
when a marked slowdown in global growth coincided with the bursting of a house price bubble as the bank aggressively raised
interest rates to tame elevated inflation. Fixed investment declined for three consecutive years between 1990 and 1992, registering
a peak-to-trough decline of roughly 12.0%.
Businesses Planning To Cut Back On Capital Expenditure

United Kingdom - Business Uncertainty, balance of responses (LHC) & Capital Expenditure Not A Priority, balance of responses (RHC)
Source: Deloitte, Fitch Solutions
We are not anticipating as severe of a decline in the coming years, not least due to the fact that public investment will remain robust
at least through to 2025. That said, we are likely to see significant weakness in the residential property sector. Planning permissions
in the UK had already declined by 14.0% y-o-y in the year-to-September 2022 and indications are that the situation has only
worsened since, with respondents to the UK Construction PMI noting in November 2022 that new residential building projects had
been curtailed in response to rising interest rates. The backdrop for business investment is similarly subdued, with business hiring
intentions softening notably over H222.
As is typical in a recession in the UK, we believe that net trade will make a positive contribution of around 0.6pp to
headline growth in 2023. The headline figure is somewhat distorted by movements in non-monetary gold that reflect London’s
status as a key metals trading hub, though the impact on growth is offset by changes in inventories. On an underlying basis, the
trade balance should continue to improve in real terms as weakness in domestic demand leads to a compression in import growth.
Export growth is also likely to slow dramatically as the UK’s key trading partners in Europe also enter recession, but favourable
statistical carryover effects should see growth remain positive in annual terms.
Macroeconomic Forecasts
UNITED KINGDOM - MACROECONOMIC FORECASTS (2022–2027)
Indicator 2022e 2023f 2024f 2025f 2026f 2027f
Nominal GDP, USDbn 3,129.5 3,129.1 3,365.4 3,554.6 3,666.2 3,781.4
Nominal GDP, EURbn 2,980.4 2,980.1 3,059.4 3,231.5 3,332.9 3,437.6
Real GDP growth, % y-o-y 4.2 -0.7 0.4 2.5 1.6 1.6
GDP per capita, USD 45,687 45,503 48,757 51,313 52,733 54,196
GDP per capita, EUR 43,511 43,336 44,325 46,648 47,939 49,269
Population, mn 67.51 67.74 67.96 68.18 68.39 68.60
Unemployment, % of labour force, eop 3.8 5.0 5.0 4.2 4.0 4.0
Consumer price inflation, % y-o-y, ave 9.0 7.0 2.6 1.9 2.3 2.3
Central bank policy rate, % eop 3.50 4.00 3.25 3.00 3.00 3.00
Private final consumption, % of GDP 61.1 61.1 61.1 61.4 61.6 61.7
Private final consumption, real growth % y-o-y 5.1 -0.7 0.5 3.0 1.9 1.9
Government final consumption, % of GDP 21.9 22.1 22.2 21.9 21.7 21.6
Government final consumption, real growth % y-o-y 1.6 0.4 0.8 1.0 1.0 1.0
Fixed capital formation, % of GDP 17.5 17.2 17.1 17.1 17.2 17.2
Fixed capital formation, real growth % y-o-y 5.0 -2.0 -0.5 2.8 1.8 1.8
Exchange rate GBP/USD, ave 0.81 0.83 0.79 0.78 0.78 0.78
Exchange rate GBP/EUR, ave 0.85 0.88 0.87 0.86 0.86 0.86
Goods and services exports, USDbn 981.3 973.5 1,063.4 1,124.4 1,160.1 1,197.1
Goods and services imports, USDbn 1,101.3 1,055.6 1,115.8 1,182.1 1,222.8 1,264.9
Balance of trade in goods and services, USDbn -120.0 -82.1 -52.4 -57.7 -62.6 -67.9
Balance of trade in goods and services, % of GDP -3.8 -2.6 -1.6 -1.6 -1.7 -1.8
Current account balance, USDbn -149.1 -119.9 -101.1 -107.3 -112.9 -118.9
Current account balance, % of GDP -4.8 -3.8 -3.0 -3.0 -3.1 -3.1
Foreign reserves ex gold, USDbn 156.3 161.0 165.9 170.8 176.0 181.2
Import cover, months 1.7 1.8 1.8 1.7 1.7 1.7
Budget balance, USDbn -172.6 -187.7 -151.4 -135.1 -128.3 -132.3
Budget balance, % of GDP -5.5 -6.0 -4.5 -3.8 -3.5 -3.5

e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
UNITED KINGDOM - MACROECONOMIC FORECASTS (2028–2032)

Indicator 2028f 2029f 2030f 2031f 2032f
Nominal GDP, USDbn 3,900.2 4,022.8 4,146.7 4,270.1 4,397.3
Nominal GDP, EURbn 3,545.6 3,657.0 3,769.7 3,881.9 3,997.5
Real GDP growth, % y-o-y 1.6 1.6 1.6 1.5 1.5
GDP per capita, USD 55,703 57,259 58,830 60,389 61,996
GDP per capita, EUR 50,639 52,054 53,481 54,899 56,360
Population, mn 68.80 68.99 69.18 69.35 69.52
Unemployment, % of labour force, eop 4.0 4.0 4.0 4.0 4.0
Consumer price inflation, % y-o-y, ave 2.3 2.3 2.3 2.3 2.3
Central bank policy rate, % eop 3.00 3.00 3.00 3.00 3.00
Private final consumption, % of GDP 61.9 62.1 62.2 62.3 62.3
Private final consumption, real growth % y-o-y 1.9 1.9 1.8 1.6 1.6
Government final consumption, % of GDP 21.5 21.3 21.2 21.1 21.0
Government final consumption, real growth % y-o-y 1.0 1.0 1.0 1.0 1.0
Fixed capital formation, % of GDP 17.2 17.2 17.2 17.2 17.2
Fixed capital formation, real growth % y-o-y 1.8 1.8 1.6 1.4 1.4
Exchange rate GBP/USD, ave 0.78 0.78 0.78 0.78 0.78
Exchange rate GBP/EUR, ave 0.86 0.86 0.86 0.86 0.86
Goods and services exports, USDbn 1,235.2 1,274.6 1,315.4 1,357.4 1,396.8
Goods and services imports, USDbn 1,308.7 1,354.1 1,401.2 1,450.1 1,500.9
Balance of trade in goods and services, USDbn -73.5 -79.5 -85.9 -92.7 -104.1
Balance of trade in goods and services, % of GDP -1.9 -2.0 -2.1 -2.2 -2.4
Current account balance, USDbn -127.8 -137.2 -147.2 -157.8 -173.2
Current account balance, % of GDP -3.3 -3.4 -3.5 -3.7 -3.9
Foreign reserves ex gold, USDbn 186.7 192.3 198.0 204.0 210.1
Import cover, months 1.7 1.7 1.7 1.7 1.7
Budget balance, USDbn -136.5 -140.8 -145.1 -149.5 -153.9
Budget balance, % of GDP -3.5 -3.5 -3.5 -3.5 -3.5

f = Fitch Solutions forecast. Source: National sources, Fitch Solutions
Household Income Forecasts

UNITED KINGDOM - HOUSEHOLD INCOME DATA (2021–2027)
Indicator 2021e 2022e 2023f 2024f 2025f 2026f 2027f
Households, number 28,080,568 28,152,183 28,223,668 28,293,689 28,361,317 28,426,351 28,488,701
Households, % y-o-y 0.2 0.3 0.3 0.2 0.2 0.2 0.2
Average working adults per household 1.5 1.5 1.5 1.5 1.5 1.5 1.5
Gross Income, per household, GBP 62,985 69,572 71,562 73,000 75,575 77,628 79,743
Gross Income, per household, USD 86,629 86,270 85,874 91,980 96,736 99,364 102,071
Gross Income, per capita, GBP 40,901 45,275 46,597 47,551 49,262 50,625 52,029
Gross Income, per capita, USD 56,255 56,141 55,916 59,915 63,055 64,800 66,598
Disposable Income, per household, GBP 52,277 57,745 59,396 60,590 62,727 64,431 66,186
Disposable Income, per household, USD 71,902 71,604 71,276 76,343 80,291 82,472 84,719
Disposable Income, per capita, GBP 33,948 37,578 38,675 39,468 40,887 42,019 43,184
Disposable Income, per capita, USD 46,691 46,597 46,410 49,729 52,336 53,784 55,276
Tax and social contributions, % of gross

17.0 17.0 17.0 17.0 17.0 17.0 17.0
income
Tax and social contributions, per capita, GBP 6,953.22 7,696.87 7,921.49 8,083.82 8,374.55 8,606.32 8,845.06
Tax and social contributions, per capita, USD 9,563.4 9,544.1 9,505.8 10,185.6 10,719.4 11,016.1 11,321.7
Households '000 earning USD5,000+ 28,069.2 28,140.5 28,211.7 28,283.9 28,352.9 28,418.5 28,481.4
Households earning USD5,000+, % total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
e/f = Fitch Solutions estimate/forecast. Source: Local sources, Fitch Solutions
United Kingdom Demographic Outlook

Demographic analysis is a key pillar of our macroeconomic and industry forecasting model. The total population and demographic
profile of a market are key variables in consumer demand and are essential to understanding issues ranging from future population
trends to productivity growth and government spending requirements.
The accompanying charts detail the population pyramid for 2022, the change in the structure of the population between 2022 and
2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key
metrics such as population ratios, the urban/rural split and life expectancy.
Population
United Kingdom - Population, mn (1990-2050)
f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions
Population Pyramid
United Kingdom – 2022 Male vs Female Population, '000 (LHC) & 2022 vs 2050 Population, '000 (RHC)
Source: World Bank, UN, Fitch Solutions
POPULATION HEADLINE INDICATORS (UNITED KINGDOM 1990-2025)

Indicator 1990 2000 2005 2010 2015 2020 2025f
Population, total, '000 57,210.4 58,850.0 60,383.7 62,760.0 65,224.4 67,059.5 68,180.6
Population, % y-o-y 0.37 0.65 0.83 0.70 0.42 0.32
Population, total, male, '000 27,798.7 28,674.5 29,525.3 30,802.8 32,128.1 33,122.4 33,728.1
Population, total, female, '000 29,411.7 30,175.5 30,858.5 31,957.3 33,096.3 33,937.1 34,452.5
KEY POPULATION RATIOS (UNITED KINGDOM 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020 2025f
Active population, total, '000 37,332.9 38,383.9 39,905.8 41,439.9 42,056.7 42,575.5 43,106.6
Active population, % of total population 65.3 65.2 66.1 66.0 64.5 63.5 63.2
Dependent population, total, '000 19,877.5 20,466.1 20,478.0 21,320.1 23,167.6 24,484.0 25,074.0
Dependent ratio, % of total working age 53.2 53.3 51.3 51.4 55.1 57.5 58.2
Youth population, total, '000 10,886.5 11,215.5 10,914.8 11,063.3 11,558.6 11,928.8 11,379.1
Youth population, % of total working age 29.2 29.2 27.4 26.7 27.5 28.0 26.4
Pensionable population, '000 8,991.0 9,250.6 9,563.2 10,256.8 11,609.1 12,555.2 13,694.8
Pensionable population, % of total working age 24.1 24.1 24.0 24.8 27.6 29.5 31.8
URBAN/RURAL POPULATION AND LIFE EXPECTANCY (UNITED KINGDOM 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020 2025f
Urban population, '000 44,704.2 46,286.1 48,255.7 51,025.2 53,892.3 56,264.9 58,038.1
Urban population, % of total 78.1 78.7 79.9 81.3 82.6 83.9 85.1
Rural population, '000 12,506.2 12,563.9 12,128.1 11,734.9 11,332.1 10,794.6 10,142.5
Rural population, % of total 21.9 21.3 20.1 18.7 17.4 16.1 14.9
Life expectancy at birth, male, years 72.8 75.4 76.9 78.4 79.1 78.4 81.0
Life expectancy at birth, female, years 78.5 80.2 81.2 82.3 82.7 82.4 84.2
Life expectancy at birth, average, years 75.7 77.9 79.1 80.4 80.9 80.4 82.6
POPULATION BY AGE GROUP (UNITED KINGDOM 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020 2025f
Population, 0-4 yrs, total, '000 3,828.6 3,550.9 3,440.8 3,870.9 4,026.0 3,757.3 3,410.0
Indicator 1990 2000 2005 2010 2015 2020 2025f
Population, 85-89 yrs, total, '000 599.3 749.1 731.3 923.6 981.9 1,056.7 1,173.3
Population, 90-94 yrs, total, '000 192.3 286.6 320.2 336.2 439.7 481.1 533.8
Population, 95-99 yrs, total, '000 37.8 61.2 74.4 89.1 98.7 136.7 154.5
Population, 100+ yrs, total, '000 4.2 6.7 8.6 11.2 13.8 17.5 24.9
POPULATION BY AGE GROUP, % (UNITED KINGDOM 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020 2025f
Population, 0-4 yrs, % total 6.69 6.03 5.70 6.17 6.17 5.60 5.00
Population, 100+ yrs, % total 0.01 0.01 0.01 0.02 0.02 0.03 0.04
Banking & Financial Services Methodology

Industry Forecast Methodology
Our industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric
modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard
practice, by the prevailing features of the industry data being examined.
Common to our analysis of every industry is the use of vector autoregressions, which allow us to forecast a variable using more than
the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil
consumption, supply and capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most
desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile
form of univariate models: the autoregressive moving average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases,
we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.
We mainly use OLS estimators, and we use a 'general-to-specific' method in order to avoid relying on subjective views and
encourage the use of objective views. We mainly use a linear model, but simple non-linear models, such as the log-linear model, are
used when necessary. During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy
variables are used to determine the level of impact.
Effective forecasting depends on appropriately selected regression models. We select the best model according to various different
criteria and tests, including but not exclusive to:
• Explanatory power: R2 tests explanatory power; adjusted R2 takes degree of freedom into account;
• Testing the directional movement and magnitude of coefficients;
• Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and
• All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.
Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience, expertise and knowledge of
industry data and trends ensure analysts spot structural breaks, anomalous data, turning points and seasonal features where a
purely mechanical forecasting process would not.
Banking & Financial Services Methodology
Our Banking & Financial Services Report series is closely integrated with our analysis of macroeconomic trends and financial
markets. The reports draw heavily on our extensive economic dataset, which includes up to 550 indicators per market, as well as our
in-depth view of each local market. We collate our banking databanks from official sources (including central banks and regulators)
wherever possible, and only fall back on secondary sources where all attempts to secure primary data have failed. Company data is
sourced, in the first instance, from company reports, with central bank, regulator or trade association data only used as a backup.
• The banking forecast scenario focuses on total assets, client loans and client deposits.
• Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular market. They do not
incorporate the balance sheet of the central bank in question.
• Client loans are loans to non-bank clients. They include loans to public sector and state-owned enterprises. However, they
generally do not include loans to governments, government (or non-government) bonds held or loans to central banks.
• Client deposits are deposits from the non-bank public. They generally include deposits from public sector and state-owned
enterprises. However, they only include government deposits if these are significant.
• We take into account capital items and bond portfolios. The former include shareholders funds, and subordinated debt that may
be counted as capital. The latter includes government and non-government bonds.
In quantifying the collective balance sheets of a particular market, we assume that three equations hold true:
• Total assets = total liabilities and capital

• Total assets = client loans + bond portfolio + other assets
• Total liabilities and capital = capital items + client deposits + other liabilities
In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and three can be
reconciled with equation one. In practice, other assets and other liabilities are analogous to inter-bank transactions. In some cases,
such transactions are generally with foreign banks.
In most markets for which we have compiled figures, building societies/thrifts are an insignificant part of the banking landscape,
and we do not include them in our figures. The US is the main exception to this.
In some cases, total assets and client loans include significant amounts that are owned or that have been lent to customers in
another market. In some cases, client deposits include significant amounts that have been deposited by residents of another
market. Such cross-border business is particularly important in major financial centres such as Singapore and Hong Kong, China the
richer OECD markets and certain Central and Eastern European markets.
Banking Industry Risk Indicator Methodology

Banking Industry Risk Indicator Methodology
Fitch Solutions' Banking Industry Risk Indicator (BIRI) is a composite score that measures the vulnerability of a market's banking
system to unpredictable and unobserved financial stress events.
BIRI is a quantitative, data-driven score expressed on a 0 to 100 scale, with 100 indicating the lowest risk and 0 indicating the
highest risk. BIRI is updated quarterly and is a point-in-time score. It incorporates banking industry and macroeconomic factors. BIRI
is a score at a market level that converts fundamental data (historical observations and model-based estimates) into a normalised
banking industry risk score.
The BIRI calculation methodology comprises the following steps:
1. Quarterly Data Sourcing. We source quarterly series from the IMF (Financial Soundness Indicators and International Financial
Statistics) and national sources such as central banks, or annual series from national or international sources (eg, World Bank) which
are interpolated into quarterly frequency. The fundamental indicators selection is based on academic literature research and
availability. To calculate the BIRI scores, all fundamental indicators selected need to be available. The data legend below provides a
high level of information including descriptions and sources.
Relation
Indicator BIRI Component Data Description Data Sources
To Risk
Regulatory Capital To Risk- Financial (Capitalisation & IMF Financial Soundness

- Ratio
Weighted Assets Leverage) Indicators, Fitch Solutions
Ratio, excess value: difference

Bank Credit (Private Sector) To
+ Financial (Credit Expansion) between current period value World Bank, Fitch Solutions
GDP
and 12-quarter moving average
Loans To Deposits + Financial (Funding) Ratio Fitch Solutions
Non-Performing Loans To Gross IMF Financial Soundness

+ Financial (Asset Quality) Ratio
Loans Indicators, Fitch Solutions
IMF Financial Soundness

Short-Term Liabilities To Total
+ Financial (Liquidity) Ratio Indicators & International
Assets
Financial Statistics

Liquid Assets To Total Assets - Financial (Liquidity) Ratio Indicators & International

Liquid Assets To Short-Term
- Financial (Liquidity) Ratio Indicators & International
Liabilities

Government Debt (% of GDP) + Government Finance between current period value World Bank, Fitch Solutions
Government Interest Payments

+ Government Finance Ratio World Bank, Fitch Solutions
(% of revenue)
Government Balance (% of GDP) - Government Finance Ratio World Bank, Fitch Solutions
GDP At PPP, USD Per Capita - Living Standard Ratio Fitch Solutions
Regulatory Quality &

Operational Risk - Index Fitch Solutions
Environment
World Bank Governance

Regulatory Quality &
Indicators: Government - Indicator World Bank
Environment
Effectiveness
Word Bank Governance Regulatory Quality &

- Indicator World Bank
Indicators: Regulatory Quality Environment

Gross External Debt (% of GDP) + International Linkages between current period value Fitch Solutions
Current Account Balance (% of

- International Linkages Ratio World Bank, Fitch Solutions
GDP)
% quarterly rolling standard IMF International Financial

Real GDP Volatility + Economic Volatility
deviation Statistics, Fitch Solutions
% quarterly rolling standard IMF International Financial

CPI Volatility + Economic Volatility
deviation Statistics, national sources
Note: In the 'Relation To Risk' column, '+' means that a higher indicator value implies higher risk and '-' means that a higher value implies lower risk. Source: Fitch Solutions
2. Data Transformation. BIRI is composed of indicators whose larger value is associated with higher risk/more elevated
vulnerabilities and indicators whose larger value is associated with lower risk/less elevated vulnerabilities. The indicators whose
larger value is associated with higher risk are pre-multiplied with a minus one, so when aggregated all indicators have the same
interpretation (larger value means lower risk).
3. Data Estimation. BIRI methodology is based on the standardisation and aggregation of historical quarterly data. When quarterly
historical data points are not available, they are estimated.
There are three cases of missing data: (i) Historical data exist but in annual and not quarterly frequency; (ii) Historical quarterly data
exist but there are some gaps between the existing historical values; (iii) Historical data are available but up to a previous quarter and
not to the latest one.
In the first two cases the missing data are estimated via linear interpolations. Linear interpolation is a curve fitting method where
new data point estimates are constructed within the range of the known historical data. Thus, when only annual data are available,
we interpolate from annual to quarterly frequency, keeping the year-end or year-average value intact. When there are gaps between
existing historical values, the linearly interpolated data are constructed within the range of these values.
When the last observations are not available, they are estimated using the fitted values from the Fitch Solutions Autoregressive
Integrated Moving Average (ARIMA) model. The model performs the three steps of the Box-Jenkins methodology: (i) Identification
(Augmented Dickey Fuller stationarity test); (ii) Estimation (Maximum Likelihood Estimation); (iii) Residuals testing (Normality test,
Autocorrelation test), as well as additional tests such as Residuals Heteroscedasticity.1 2 3
1
We avoid extrapolation techniques to populate the edge missing values, because they often produce inaccurate estimates.
2
We do not estimate annual, survey-based indicators. We drag forward and fill in the quarterly values with the previous annual value
available.
3
There are very few cases when it is not possible to create a model-based estimate (for example, because the outcome of one of the
corresponding hypothesis tests in the Box-Jenkins methodology is not desirable). In these cases, any missing latest historical values
are filled with estimates based on trend analysis.
4. Fundamental Indicators Normalisation. Because the fundamental indicators are not of the same measure, we normalise
them using the min-max approach. This approach ranges the fundamental data from 0 to 100. Upper and lower time-invariant
bounds have been imposed on the distributions to ensure that we obtain scores that do not change over time, so they are
comparable. The lower and upper bounds have been based on the first and 99th percentiles respectively, of the distribution of the
historical fundamental data available up to Q4 2021.
The min-max approach for the fundamental indicator X is:
Xnormal_t = [ (X_t – min(X)) / (max(X) – min(X)) ] x 100
where Xnormal_t is the normalised value at time t, X_t is the actual value of the fundamental indicator at time t and min(X) and
max(X) are the minimum and maximum values (ie, the lower and upper time-invariant bounds respectively) of the corresponding
fundamental indicator.
5. Principal Component Analysis. BIRI comprises six components which are made up of fundamental indicators. The weights
assigned in each linear combination of components or indicators are based on Principal Component Analysis (PCA). This is a
statistical procedure that converts and linearly combines our components/indicators into the most important variables called
principal components. Principal components explain most of the variance and summarise the most information in our data. First, we
apply PCA, separately, to the fundamental indicators that form each BIRI component. Then we apply the PCA to the six BIRI
components. We select weights and then construct linear combinations that have a very high Pearson correlation coefficient with
the first (most important) principal component calculated from the corresponding PCA.
The indicators are standardised before being used for PCA. The standardisation is different to the min-max approach described
above. The fundamental data used for PCA are standardised by subtracting the sample mean and dividing by the standard
deviation. Standardisation ensures that all indicators become of the same measure. For PCA analysis, we use a historical sample
available that consists of 122 markets.
6. Normalised Fundamental Indicators Aggregation Into Components. First, we aggregate the normalised fundamental
indicators into components.
Below is a summary of the sub-categories of the Financial component, as well as the first aggregation step.
Financial Component Sub-Categories
• Capitalisation & Leverage: Regulatory Capital To Risk-Weighted Assets

• Credit Expansion: Bank Credit To GDP gap (excess value: difference between current period value and 12-quarter moving
average)
• Asset Quality: Non-Performing Loans To Gross Loans
• Funding: Loans To Deposits
• Liquidity: Weighted average of Liquid Assets To Total Assets, Liquid Assets To Short-Term Liabilities, Short-Term Liabilities To
Total Assets
Aggregation Level 1 – From Normalised Fundamental Indicators To Components
• Financial Component = weighted average of Capitalisation & Leverage, Asset Quality, Funding, Credit Expansion, Liquidity
• Government Finance Component = weighted average of Government Debt (% of GDP), Government Interest Payments (% of
revenue), Government Balance (% of GDP)
• Regulatory Quality & Environment Component = weighted average of Operational Risk, Government Effectiveness,
Regulatory Quality
• Living Standard Component = GDP At PPP, USD Per Capita
• International Linkages Component = weighted average of Gross External Debt (% of GDP), Current Account Balance (% of
GDP)
• Economic Volatility Component = weighted average of Real GDP Volatility and CPI Volatility.
7. Components Normalisation. After the first level of aggregation, the six components are normalised using the min-max
approach described in step 4 above. The lower and upper time-invariant bounds used are based on the 1st and 99th percentiles
respectively, of the distribution of the historical component scores most recently available.
8. Normalised Components Aggregation Into BIRI. The second step of aggregation is to linearly combine the six normalised
components to calculate BIRI.
Aggregation Level 2 – From Normalised Components To BIRI
BIRI = weighted average of normalised Financial component, Government Finance normalised component, normalised Regulatory
Quality & Environment component, normalised Living Standard component, International Linkages normalised component,
normalised Economic Volatility component
9. BIRI Normalisation. The weighted average of the six normalised components (BIRI) is normalised to ensure that it is expressed
on a 0 to 100 scale.
Aggregation Methodology
Source: Fitch Solutions
Fit
Fitch
ch Solutions, 30 North C
Colonnade
olonnade,, Canary W
Wharf
harf,, L
London.
ondon. E14 5GN, UK
Tel: +44 (0)20 7248 0468
Fax: +44 (0)20 7248 0467
Web: www.fitchsolutions.com
IS SN: 2514-5134
ISSN:
Copy Deadline: January 2023

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Fitch
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This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an
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Q2 2023

Banking Industry Risk Analysis ................................................................................................................................................ 8

Banking Industry Risk Analysis ..............................................................................................................................................11

Asset Management .....................................................................................................................................................................42

Macroeconomic Overview ........................................................................................................................................................55

Household Income Forecasts................................................................................................................................................................................................61

United Kingdom Demographic Outlook...............................................................................................................................62

Banking & Financial Services Methodology........................................................................................................................65

Banking Industry Risk Indicator Methodology ..................................................................................................................66

Loan Growth To Slow In 2023 But Will Rebound Thereafter

e/f=Fitch Solutions estimate/forecast. Source: Bank of England (BoE), Fitch Solutions

Latest Trends And Developments

UNITED KINGDOM - FINANCIAL SERVICES FORECASTS (2021–2026)

UNITED KINGDOM - FINANCIAL SERVICES FORECASTS (2027–2032)

Banking Industry Risk Analysis

Banking Sector Risk Remains Elevated Compared With Pre-Pandemic Levels

Financial Component Continues To Improve

Banking Industry Risk Analysis

Denmark 100.00 100.00 77.09 96.89 93.70 73.02 58.55

Norway 100.00 81.90 100.00 92.25 100.00 100.00 70.94

Switzerland 100.00 87.65 70.74 98.05 97.03 72.95 67.76

Singapore 95.13 71.38 65.74 100.00 100.00 75.33 50.66

Ireland 94.47 77.18 71.65 87.71 100.00 74.68 51.66

Luxembourg 94.39 70.33 71.13 93.49 100.00 71.18 58.75

Germany 87.88 80.54 63.07 84.85 91.39 58.59 56.08

United States 86.61 82.04 55.51 86.51 95.62 46.92 54.81

Netherlands 86.39 64.51 66.07 94.44 93.67 72.81 48.06

Sweden 86.34 65.45 73.93 92.15 92.64 60.76 54.82

Canada 83.99 67.05 66.85 90.45 89.85 63.57 52.39

Australia 82.09 57.62 63.72 89.62 92.86 65.51 60.15

Austria 80.83 69.39 62.12 86.25 92.18 59.71 45.01

Finland 79.89 50.54 65.08 95.94 90.58 56.76 64.52

Cyprus 77.51 82.41 78.65 66.29 87.01 52.60 37.91

Estonia 75.56 71.83 68.85 81.58 85.67 56.59 33.18

South Korea 73.48 57.59 59.07 80.83 87.38 41.40 70.58

Japan 72.24 56.54 45.99 85.03 85.19 48.97 68.70

United Kingdom 71.25 72.26 40.74 85.44 88.17 46.42 36.09

Belgium 70.85 53.65 59.31 80.78 91.67 57.89 47.12

Iceland 69.82 55.38 52.12 87.03 92.37 45.50 45.02

Czech Republic 68.60 67.46 54.80 77.58 86.61 44.14 39.39

Portugal 68.26 63.45 73.48 71.33 83.25 57.59 34.18

Malta 67.89 74.79 49.84 69.01 88.69 46.72 34.45

France 67.89 52.92 54.31 80.10 88.75 54.73 48.54

Israel 67.03 41.00 73.59 78.66 86.79 52.08 59.50

Italy 66.84 73.37 49.65 60.66 87.37 54.87 41.07

Slovenia 66.73 51.57 68.79 71.61 87.12 66.95 40.18

Greece 62.17 73.96 76.10 55.10 80.92 43.31 27.61

Spain 61.45 53.30 58.32 73.34 85.27 57.49 31.82

New Zealand 59.55 30.63 49.91 88.89 86.55 38.07 64.00

Slovakia 58.49 55.51 55.80 61.87 80.55 47.62 50.46

Slovakia 55.98 53.30 53.11 62.80 80.28 44.67 48.01

Asset Growth Stalling

Latest Trends And Developments

Mortgage Lending Slowdown To Weigh On UK Loan Growth In 2023

Recession To Weigh On Credit Growth

Source: Bank of England (BoE), Fitch Solutions

Net Mortgage Lending On A Downward Trend

Source: BoE, Fitch Solutions

Rate Hikes Weighing On Mortgage Applications

Source: BoE, Fitch Solutions

Households Taking On Increasing Consumer Debt

Source: BoE, Fitch Solutions

Household Savings Rate Beginning To Rise

Source: BoE, Fitch Solutions