Total business volumes in the financial services sector fell slightly in the three months to December, marking the first contraction of demand since September 2013. That’s according to the latest CBI/PwC Financial Services Survey.
Meanwhile, sentiment among financial services deteriorated further, rounding off three full years of flat or falling optimism.
The quarterly survey of 84 firms reveals a marked divergence in business conditions between sub-sectors, with sentiment holding up among insurers amid a continued expansion in their business volumes. By contrast, volumes were flat or falling for banks, building societies and specialist lenders, while investment managers report the steepest fall in activity since the financial crisis.
Overall business volumes are expected to fall at a similar pace over the quarter to March, the first-time growth expectations have turned negative since December 2009. Financial services firms - particularly banks, building societies and general insurers - see macroeconomic uncertainty as the most important challenge over the year ahead, ahead of regulatory compliance and preparing for the impact of Brexit.
Profits in the financial services sector as a whole were remained flat for a third successive quarter, reflecting little change in business volumes and costs. Investment managers and general insurers reported declining profitability. In the three months to March, overall profitability is expected to fall for the first time in over three years, as a result of a more widespread deterioration in expectations across the industry.
Rain Newton-Smith, CBI chief economist, said:
“A combination of macroeconomic and Brexit uncertainty, regulatory compliance and global market volatility are taking a toll on the UK’s financial services sector. Financial services are a bellwether for the wider economy. The persistent weakness in optimism and the deterioration in expectations sound a warning for the outlook.
“It’s clear the sector is grappling with a number of other challenges too, from using data to improve customer experiences, to new entrants to the sector. However, with new risks and demands come opportunities. Insurers in particular are pulling ahead, many of whom are moving into areas such as asset management outside of their traditional markets.”
Andrew Kail, head of financial services at PwC, said:
“Continued economic and political uncertainty means last year ended on a more pessimistic note than previous quarters for many working in UK financial services. It's a broad industry, meaning optimism varies between sub-sectors and companies, but this survey shows that investment managers, who have been more immediately impacted by volatile stock markets, are gloomiest heading in to 2019.
“The underlying reasons for this dip in optimism have been around for some time – political and Brexit-related uncertainty, regulatory pressures and a sustained low interest rate environment impacting margins. Competition from established peers as well as new market entrants is also high on companies' radars.
“UK financial services firms looking to prosper in 2019 should concentrate on issues they can control. Most importantly, by focusing on clear strategies for delivering value through products and services which meet their customers' needs, maximising the efficiency of delivering these services - keeping operating costs under control - and using technology to augment the quality and efficiency of activities across their business.”
Despite this outlook, firms expect to increase headcount in the quarter to March and investment intentions for the year ahead remain broadly stable. Financial services firms plan to raise spending on marketing and IT at robust rates, and capital spending in other areas is expected to be unchanged. Firms indicated that efficiency and replacement were the main drivers of investment, alongside statutory legislation and regulation.
Although growth in compliance spending continues to moderate, the regulatory environment is seen as the most important constraint on business expansion in the year ahead. Banks, insurance brokers and finance houses were most dissatisfied when asked whether regulators are keeping pace with digital innovations (such as digital documents, on-line platforms or apps) that could help support regulatory implementation and compliance. Common data standards/formats are seen as the most important digital innovation regulators could adopt in the next 18-24 months to help reduce the costs of regulatory implementation and compliance.
The more pessimistic outlook for the financial services sector in the near term is in keeping with the subdued prospects for the wider UK economy, with GDP growth expected to be held back by weak household income growth and the impact of Brexit uncertainty on investment. For more detail on our view of the economic outlook, see our December economic forecast.
Incomes, costs and profits:
Investment over the next 12 months:
In the year ahead, financial services firms expect to increase spending on IT and marketing, and for other forms of capital spending to remain stable:
The main reasons for authorising investment are cited as:
The main factors likely to limit investment are cited as:
Business expansion over the next 12 months:
The most significant potential constraints on business growth over the coming year are:
Top three challenges for the year ahead:
Satisfaction with digital innovation by regulators:
Most important digital innovations for regulators: