Sentiment continued to deteriorate across the financial services sector as a whole in the three months to September, despite a broad-based expansion of business volumes and expectations of a stronger quarter ahead.
That is the conclusion according to the latest CBI/PwC Financial Services Survey, the quarterly survey found that overall optimism about the business situation fell slightly, having deteriorated fairly steadily since the beginning of 2016.
But while banks and building societies were markedly less optimistic, finance houses, life insurers and investment managers were more optimistic than they had been in the previous three months.
Growth in overall business volumes slowed in comparison with the first half of 2017, but the overall level of business was deemed to be normal. Volumes expanded in all but one sub-sector – building societies – where volumes contracted at the fastest pace since 2011. Looking ahead, demand in the financial services sector as a whole is expected to strengthen next quarter, although building societies expect little respite, with a further fall in volumes expected.
Growth in profits improved for a third successive quarter, although – as with business volumes – more slowly than in the first half of the year. Profitability is generally expected to improve at a more robust pace in the three months ahead. Building societies are again the exception, as falling volumes coupled with rising average costs saw profits drop, as they are anticipated to do in the next quarter.
Across the sector as a whole, employment remained stable in the three months to September. Firms expect to step up the pace of hiring over the coming quarter. Investment intentions for the year ahead have improved significantly, with marketing budgets increasing, investment in IT anticipated to rise at the fastest pace in two and a half years, and planned investments in land & buildings rising for the first time since 2014.
Rain Newton-Smith, CBI Chief Economist, said: “It’s encouraging to see volumes and profitability continuing to expand for most financial services firms, with hiring expected to pick up and investment intentions improving.
“While demand in the sector is expected to hold up in the near-term, we can’t ignore the fact that optimism has dropped in almost every quarter for the past two years. With Brexit uncertainty affecting the wider economy, it’s vital that substantive progress is made during the next round of Brexit negotiations, so that transitional arrangements can be agreed and businesses can make decisions now about investment and employment that will affect economic growth and jobs far into the future.”
Andrew Kail, Head of Financial Services at PwC, said: “This quarter’s survey finds levels of employment stabilising for financial services firms, and almost two thirds will boost their IT spend – it’s clear that sector activity marches on.
“However, the financial services sector is at a crossroads. The way ahead is uncertain, particularly as Brexit negotiations are yet to be resolved. A co-ordinated action is now required by government, financial services firms and regulators to ensure the continued future success of the industry and its customers.
“Specifically, the UK’s regions must also be given every opportunity to flourish as domestic and specialist financial services centres.
“Above all, efforts must be maintained to retain and increase trust among customers.”
The most important motivations for investment in the quarter to September were the need to increase efficiency and ensure regulatory compliance, with spending on regulatory compliance predicted to increase at the fastest pace since the question was first asked in this Survey in 2006. The share of firms investing to provide new services also hit a two-and-a-half year high.
Considering the broader future of the financial services sector, firms see a need for action on a number of fronts to ensure that the UK remains a leading financial centre in 2025. In particular, maintaining the UK’s position as a leading FinTech and innovation centre is seen as a vital ingredient for the sector’s success, along with preserving access to talent and ensuring internationally focussed regulation.
Firms across the sector appreciate the importance of promoting trust and a focus on what is right for customers. Around three quarters have already have assigned responsibility for prioritising customers’ interests to specific board members or executives, with a similarly high share linking performance and remuneration to customer outcomes. For older customers, however, the survey suggests that firms pursue a relatively narrow range of strategies to meet their needs.