Economic Statistics Transformation Programme: enhanced financial accounts (UK flow of funds) – institutional sectors and financial instruments, explanatory notes: 2016

Office for National Statistics (ONS) published a series of explanatory notes to accompany new experimental from-whom-to-whom statistics published since March 2015. These explanatory notes outline the data sources and methods used in the construction of these matrices. The explanatory notes are important in increasing user understanding of the financial account data.

As part of the ongoing development programme of these Experimental Statistics, we have produced this additional note, which provides a further explanation of the institutional sectors and financial instruments that are referred to in the detailed explanatory notes.

ONS welcomes feedback on the information included in this document. Any feedback on this explanatory note can be sent to flowoffundsdevelopment@ons.gov.uk.

Robust classifications are needed to produce good quality national accounts that are internally consistent and comparable across the world. It is a legal requirement for the UK to compile the national accounts’ statistics in accordance with the European System of Accounts 2010 (ESA 2010), which is done by Office for National Statistics (ONS). The two main areas of classification that ONS engages in are classifying institutional units and classifying transactions.

Office for National Statistics (ONS) assesses institutional units against international regulations to decide how they should be treated in the UK National Accounts. Institutional units are defined as being entities with the economic competence to own goods and assets, incur liabilities and enter into contracts in their own right. They also have the ability to produce a complete set of accounts.

The economy consists of a large number of institutional units such as businesses, government bodies and households. These institutional units are classified into institutional sectors according to their characteristics. Each of these sectors is discussed in more detail in this section.

Public corporations (PCs)

The public corporations (PCs) sector contains institutional units that satisfy the following three conditions:

• the unit is classified as a market body – a body that derives more than 50% of its production costs from sales of goods or services at economically significant prices
• the unit is controlled by government or another public corporation
• the unit has substantial day-to-day operating independence – it is a separate unit from its parent

Private non-financial corporations (PNFCs)

The private non-financial corporations (PNFCs) sector consists of trading businesses in the private sector. This sector is diverse and examples of units within the sector include retailers, manufacturers, and accountancy and law firms amongst many others.

Monetary financial institutions (MFIs)

There are three sub-sectors within the monetary financial institutions sector:

• Central Bank – the Bank of England
• deposit-taking corporations – retail banks and building societies
• money market funds – investment funds that only invest in short-term debt securities such as treasury bills, certificates of deposit and commercial paper; they can also invest in long-term debt securities with a residual short-term maturity

Other financial institutions (OFIs)

The other financial institutions (OFIs) sector contains a wide range of units who engage in lots of different activities. There are four sub-sectors within the other financial institutions sector:

• non-money market funds – investment trusts, unit trusts and other collective investment schemes whose investment fund shares or units are not close substitutes for deposits
• other financial intermediaries – largely consists of financial institutions that are engaged in long-term financing; examples of institutional units that are classified within this sub-sector include security and derivative dealers, finance leasing companies, venture and development capital companies, and export and import financing companies
• financial auxiliaries – contains a wide range of institutional units who perform many different activities; examples include insurance brokers, investment advisers, fund managers and payment institutions (facilitating payments between buyer and seller)
• captive financial institutions and money lenders – there are two distinct groups within this subsector: captive financial institutions, which includes holding companies and special purpose entities, and money lenders

Insurance corporations and pension funds (ICPF)

There are two distinct parts to this institutional sector. Firstly, insurance corporations consist of units that provide services of life or non-life insurance, and reinsurance. Secondly, pension funds consist of units that act as social insurance schemes and provide income in retirement, and other benefits for death and disability.

Central government (CG)

The central government sub-sector consists of administrative departments and central agencies whose competence extends over the whole of the economic territory. An example of a unit within this sub-sector is HM Treasury.

Local government (LG)

The local government sub-sector consists of types of public administration whose competence extends to only a local part of the economic territory.

Households (HH)

The households sector captures groups of people who share the same living accommodation and who also share some or all of their income and collectively consume certain types of goods and services such as food or electricity. The households sector also captures those who are self-employed.

Non-profit institutions serving households (NPISH)

The non-profit institutions serving households (NPISH) sector captures institutions that provide goods and services, either free or below market prices. NPISH income is mainly derived from grants and donations and they are not controlled by government. Examples of units in the NPISH sector include charities, trade unions and political parties.

Rest of the world (RoW)

The rest of the world (RoW) sector captures all institutions and individuals that are not resident in the UK but have economic interactions with units that are resident in the UK.

The European System of Accounts 2010 (ESA 2010) records a wide range of transactions that take place between the various units in the economy.

F.2 – Currency and deposits

The financial instrument F.2 (currency and deposits is made up of two distinctive parts: F.21 - currency and F.22 and F.29 - deposits. Currency relates to the amount of physical notes and coins a unit holds. Deposits relate to the amounts that units hold in bank accounts.

F.3 – Debt securities

The financial instrument F.3 (debt securities) are negotiable financial instruments serving as evidence of debt. This instrument mainly consists of bonds. A bond is a debt investment in which an investor loans money to an entity which borrows the funds for a defined period of time at a variable or fixed interest rate.

F.4 – Loans

The financial instrument F.4 (loans) consists of short-term and long-term loans. Loans are created when creditors lend funds to debtors.

F.5 – Equity and investment fund shares

The financial instrument F.5 (equity and investment fund shares) consists of equity and investment fund shares or units. Equity can be defined as listed shares, unlisted shares and other equity. Investment fund shares are shares of an investment fund if the fund has a corporate structure. Investment fund units are shares of an investment fund if it is structured as a trust. Investment funds are collective investment undertakings through which investors pool funds for investment in financial and non-financial assets.

F.6 – Insurance, pensions and standardised guarantee schemes

The financial instrument F.6 (insurance, pensions and standardised guarantee schemes) consists of three distinct parts:

• non-life technical reserves – these are financial claims policy holders have against non-life insurance corporations
• life insurance and annuity entitlements – these are financial claims policy holders and beneficiaries have against corporations providing life insurance
• pension entitlements – these are financial claims that current and former employees hold against their employer, or their pension scheme

F.71 – Financial derivatives

The financial instrument F.71 (financial derivatives) are used for a number of purposes including risk management, hedging and arbitrage against markets. Financial derivatives enable institutional units to trade specific financial risks such as interest rate risk, currency, equity and credit risk to other institutional units that are willing to take these risks, usually without trading in a primary asset.