Financial services sector's mood worsens over Brexit uncertainty

Most British firms fear the impact of Brexit on the UK’s position as a leading global financial centre, although business volumes are expected to pick up in the first three months of 2018, a survey from the CBI and PwC has found.

In the last quarter of 2017, the survey found optimism in the financial sector has fallen for two years straight, the longest period of falling sentiment since the financial crisis of 2008.

Even though profitability improved slightly in the three months leading to December, it still disappointed expectations.

Income from fees, commissions and premiums also rose (+7%), and there is an 18% rise expected for the coming months in income from net interest, investment and trading.

On the other hand employment is still going through a rough patch with 32% of firms saying their headcount fell in the last quarter of 2017. Numbers are expected to remain as they are in the next quarter (0%).

Most banks, building societies and general insurers are concerned about the impact of Brexit on the financial services sector with 9 out of 10 firms saying it’s the most serious challenge to the UK’s position as a financial hub.

However, there is still room for positivity since finance houses, life insurers and investment managers are feeling more optimistic about the coming year.

Looking towards the first quarter of 2018, overall business volumes are expected to pick up over the coming months with 17% of firms expecting a rise in volumes and a 3% expecting a fall.

The 13% of firms surveyed said at the end of 2017 that they were more optimistic about the overall business situation compared with three months ago, although 35% were less optimistic.

More firms are deciding to spend extra on IT and marketing to increase efficiency and capacity but cut back on vehicles, plant and machinery (-28%, lowest since 2015) and on land and buildings (-50% lowest since 2009).

Aside from the Brexit uncertainty, companies are also worried about the quality of infrastructure in the UK might be lagging behind other countries.

A 54% of the surveyed firms want to see measures to attract entrepreneurial, digital and financial talent to the UK’s FinTech sector. Furthermore 52% want an acceleration in the digitisation services and greater investment in the UK’s broader technology infrastructure.

Rain Newton-Smith, the CBI's chief economist, said that although the financial sector ended 2017 on a stable footing there are many underlying problems to be addressed.

“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.

She also adds that the constant regulation changes are “slowly sucking the life out” of the financial services.

“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.”

Andrew Kail, head of financial services at PwC, said that the financial services sector must prepare itself to work without the single trading market.

“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.”