19 March 2018
Developing UK access to Framework Programme 9
29 January 2018
Nine in ten firms see Brexit as the most serious threat to UK’s status as financial centre
Optimism in the financial services sector fell for the third consecutive quarter in 2017 in the three months to December, rounding off two years of continuous flat or worsening sentiment, but business conditions saw moderate improvement, according to the latest CBI/PwC Financial Services Survey.
The quarterly survey of 92 firms found that optimism about the overall business situation in the financial services sector fell significantly, having declined in seven out of the last eight quarters. However, the subdued mood last quarter was not universal: while banks, building societies and general insurers were decidedly less positive than three months earlier, finance houses, life insurers and investment managers felt more optimistic.
Growth in overall business volumes slowed for a second consecutive quarter, though conditions varied across the financial services sector. Volumes were unchanged in banking, following two quarterly increases. Building societies reported that volumes rebounded, after falling in the previous quarter. Meanwhile, providers of specialist finance, life and general insurance, and investment management continued to report robust demand growth. Looking ahead, overall business volumes are expected to pick up a little over the coming three months, with a similarly mixed picture across sectors.
2018 brings several challenges for the financial services sector. Most striking is Brexit, with virtually all firms viewing the impact of Brexit uncertainty as the most serious threat to the UK’s position as a leading global financial centre. Companies are also concerned about other areas that threaten the UK’s global competitiveness, with half citing the perception that the quality of the UK’s physical and digital infrastructure lagged behind other advanced economies, and around a third pointing to an increasingly complex tax regime and the gold-plating of international standards.
“With overall business levels seen as broadly typical, and demand and profitability continuing to expand, the financial services sector ended last year on a stable footing.
“Scratch the surface, however, and a different story is revealed. Optimism in parts of the sector has been falling for the last two years, whilst firms are nearly unanimous in voicing their concern about the damaging impact of Brexit uncertainty and the need for the UK to remain a vibrant centre of FinTech and innovation. To restore some confidence, financial services firms absolutely must – no ifs, no buts – get as much certainty as possible on what the UK is aiming for in the Brexit negotiations, the opportunities of success and the consequences of failure.
“The never-ending burden of regulatory changes is slowly sucking the life out of financial services firms, and has repercussions far beyond the Square Mile. It puts a dent in the wider economy by acting as a drag on productivity, and consequently, living standards.
“A thorough assessment needs to be carried out to identify those regulations that deliver clear economic benefits and that should be carried forward, while pressing the pause button on those where the benefits for financial stability relative to the cost on the wider economy are uncertain.”
“The UK is set to leave the EU exactly 14 months from today. A transition period is likely, but ultimately the financial services sector - a critical part of the economy - must prepare itself to operate without membership of this key trading market. The industry will need to take positive action if it is to preserve its trading status and business model. There is much activity in boardrooms despite the question mark over trade negotiation outcomes. In the coming months we can expect to see more detail on companies’ updated contingency planning.
“However, Brexit is just one of the issues the UK financial services sector is grappling with. Investing heavily in technology to improve efficiency and the customer experience, preserving profitability in light of falling margins, and regulatory demands such as Open Banking and PSD2, Mifid II and GDPR are also high on the agenda. How the industry deals with this myriad of challenges will be pivotal to future success.
“Against this backdrop, businesses are actively thinking about their workforce needs for the future. Focusing on the attributes, skills and number of employees they will require to be successful in the years ahead is now a key strategic issue.”
Profits in the sector as a whole continued to improve, although at a pace significantly below expectations, and growth in profits is generally expected to remain similar in the three months ahead.
Employment dipped, having stagnated in the previous quarter, with firms planning to keep headcount stable in the three months to March.
Looking to the year ahead, financial services firms continue to plan for higher spending on marketing and IT, but expect to cut back in other areas of capital spending. Efficiency improvements remained the most important driver of investment, though the share of firms looking to expand capacity also rose. The main brake on investment spending remains inadequate net returns, with citations well above average and rising to the highest since 2015.
Similarly, three-quarters of firms saw the level of demand as a brake on business expansion, the highest share in over two years. Alongside this, a similar number saw statutory legislation and regulation as a constraint on business expansion. Meanwhile, the importance of new products and services to business expansion in the year has diminished, with growth strategies becoming more focussed on acquiring new customers, aided by a focus on sales and distribution.
In the year ahead, financial services firms expect robust increases in spending on IT and marketing, but to cut back on other forms of capital spending:
The main reasons for authorising investment are cited as:
The main factors likely to limit investment are cited as:
The most significant potential constraints on business growth over the coming year are:
19 March 2018
Developing UK access to Framework Programme 9
16 March 2018
Businesses have been invited to submit ideas for the Industrial Strategy Challenge Fund, and assured on continued participation in Horizon 2020 projects.
07 March 2018
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