Audio transcript: CBI Survey Results Q4 2022

Transcript

Good morning, everybody, and welcome to our LinkedIn Live for this morning. We're going to be looking back at what's been a significant 12 months in the financial services sector and also considering some of the challenges and opportunities ahead. PwC has partnered with the CBI for over 25 years, using our quarterly survey to focus on key trends and the overall pulse of the financial services industry.

Our latest survey is really interesting. While optimism has increased, firms are grappling with sort of mixed sentiment across different parts of the financial services landscape, with the growing impact of a challenging economic outlook, volatility, regulation, technology, labour, skills, all those things to contend with. So I think there's probably plenty for us to talk about this morning. I'm Andrew Strange, I lead PwC’s Financial Services Regulatory Insights team.

I'm delighted to be joined by Isabelle Jenkins, who's PwC's UK Financial services leader, and Charlotte Dendy, who's the Head of Economic Surveys and Data at the CBI. So Charlotte, do you want to just briefly introduce yourself? Yeah, absolutely. Hi everyone. I basically within my role, oversee everything, all surveys at the CBI so whether that's our economic surveys which includes financial services survey.

But we also cover manufacturing services and distribution. I also look after all the policy surveys at the CBI as well and our newer CBI economics venture, which is our sort of new consulting side of the business too. Amazing. Thank you. Well, thank you for taking the time to join us today. And Isabelle. Do you want to just say a little bit about yourself as well?

Yeah no, really glad to be here with you, Charlotte and Andrew. My name is Isabelle Jenkins. I'm the Head of Financial Services for PwC in the UK. So I'm responsible for making sure we deliver great services for our clients, but also understanding what is going on in the industry and making sure we're taking insight to them.
Brilliant. Thank you. That's great. So, well, let's. Let's crack off. Let's get straight down into it. Charlotte So to start us off, how's the last 12 months from an economic standpoint impacted financial services from your perspective? Well, in terms of trends in the FS sector, according to our Financial services survey, the picture's actually been a largely positive one. Despite seeing optimism deteriorate over much of 2022, it then improved, as you've just mentioned, in our latest survey.

Nevertheless, business volumes and profitability grown over the last year despite spreads falling, and obviously this is positive for the industry as a whole. For the next three months however, we do sense a bit of a change. Expectations point to the decline in volumes and of course this may link to the economic downturn that we're expecting to see and I'm sure we will come on to that later in conversation. But the employment picture has been mixed,

However, despite the latest survey, seeing strong growth. On investment, spending on tangible assets such as land and buildings is set to be cut back over the next 12 months. While IT is set to grow at a strong pace after spending stalled in Q3 last year. And then we kind of tweaked questions in our survey to highlight the latest trends and themes that we're seeing in FS, and to of course, provide the most up to date data that we possibly can.

And we found as the year has gone on, that regulation remained a top driver of disruption. However, in the middle of last year, cost of living obviously rose up through the rankings as inflation hit everyone's bank. So climate change, as well as being a growing disrupter and concern with ESG and topping up there as well to. Throughout the year, we've also found that a majority of FS firms responding to this disruption by upskilling their existing workforce again, reskilling being a really key trend that we've seen in the sector over the last year.

Employing new tech or adapting tech capabilities in the business was also a key way that firms were responding to this disruption too. As I've just mentioned, reskilling remains a key theme and we updated the survey to include this. It was cited as one of the top three workforce priorities for the year ahead for FS firms and alongside reskilling, supporting employee financial wellbeing also rose up the ranks, probably most likely related to cost of living and issues we were seeing from the middle of last year, as well as employee retention and achieving high levels of employee engagement.

We also asked what the main objectives FS firms are seeing from reskilling and they cited improved workforce agility, increased staff retention and cost saving instead of making redundancies. As I've just mentioned, cost of living with the theme that we put into our survey from the middle of last year and in our latest survey, a combined 70% of FS firms have initiatives to support consumer and/or commercial clients with the cost of living and/or at cost of doing business.

Three quarters also stated that they think that organisations in their sector can support consumers through early identification and support for customers facing hardship, providing educational resources on financial products and improving access to these products also ranked really highly in our latest survey. And then finally, ESG obviously remains an extremely important topic in the sector, and the most common climate change priority over the next three months is varied

When we've asked this question over the last year, however, planning practical steps towards net zero goals has almost always ranked highly, while, accelerating green financing options and products to support the wider transition to net zero goals has risen up the ranks. And just a final point, the key challenge cited last year by FS firms when establishing a net zero target was devising a plan on how to reach it, and as always with these things, it’s always about where to begin and what plan to kind of to begin with. So there's just some context there on FS economic conditions and some of the key things we've seen coming through from our survey. Brilliant, thank you Charlotte. Really interesting. Isabelle, I mean, from your side, are we seeing any significant themes from FS clients in terms of how they're responding to some of those challenges?

Yeah, no. And a lot of what I'm going to say is, is going to build on what Charlotte just said. And, you know, as Charlotte said, gosh, we saw a bit of rollercoaster during the year in terms of sentiment. So if you go back 12 months ago, the end of 2021 actually post-COVID sentiment was high. There was a lot of optimism and a lot of optimism about the ability for financial services to grow the business and prospects going forward.

We then saw drops in quarter one and quarter two, and then in quarter three we had the biggest drop since quarter two of 2019, which was of course, when organisations were worried that we might be going into a no deal Brexit. And one of the really interesting indicators we saw in quarter three, and Charlotte talked about this, continued investment in technology was actually in quarter three, we suddenly saw for the first time in ten years financial services organisations saying that they were going to put a pause on IT investment and that, gosh, when we looked at the results, I think that was something that was quite, you know, almost quite shocking because we all know about the level of investment and the reliance that the financial services has on technology.

And then we get to quarter four of last year and we see a big rebound. And so confidence recovering as the market stabilised. We obviously had the Edinburgh reforms announced, and Andrew, I'd love to get, as our Head of Financial Services Regulatory and so I'd love to get your insight on the market reaction to the Edinburgh reforms.
Just a lot of positive messages at that point came out from the Government reiterating their support for FS. So what are the, you know, what have we seen financial services react? A lot of these points come back to what Charlotte has said. I would say that with three main themes we saw people acting on, the first was ESG, but as Charlotte said, it was about embedding ESG and we moved during the year at the early beginning of the year, a lot of the themes we were seeing were about responsible growth, sustainable finance as we got further through the year, it shifted a little bit to this balance between short term and long term and really people being very focused on ‘what do we need to do in the short term and what do we need to get going?’. The second area, absolutely employee focus. At the beginning of the year, it was very much about how do we reconnect with our employees. Charlotte talked about the actually supporting the financial stability of employees, but actually you know it, maybe we'll come onto it later, there is still a war for talent. 5% of financial services jobs in the UK are unfilled. 70% of insurers cite skills shortages as a major problem. The last area then is cost of living. As Charlotte said again, it moved a little bit from sort of quarter two about giving back to customers focus on financial wellbeing and literacy, consumer protection, obviously linking to consumer duty regulation as we get towards the end of the year, we start to see more themes coming out about actually how will they deal with it with maybe a credit crisis, how will they deal with forbearance on lending and customers needing payment holidays?

The two big areas of investment across the board are technology and skills. As Charlotte said, and that that's just for everybody. Those are the two errors that come out. Thank you, Isabelle. Yeah, I agree. I mean, really interesting. And I think the Edinburgh Reform piece I think is fascinating actually, when I look at the way some of our clients have responded to it.

I mean, I think certainly before Christmas when it came out, there was a debate around actually how much of this sort of really was deregulatory versus how much of this was around that kind of growth and competitiveness agenda. I think reflections I've heard from clients are that there's really good potential change coming that's really going to help the financial services sector.

But the reality is the breadth and speed of what the government and the regulators is trying to do is really tough. And even good change costs money and saps bandwidth and takes resources. So I think that's a key message we've heard. I actually think also when we look at some of this, it probably isn't quite as deregulatory as some people had hoped.

You know, it may well be that the review of the senior managers regime results in a slightly more pragmatic approach. You know, the UK solvency to risk margin might benefit from maturing slightly. If you are a medium sized bank, the ring fencing changes might be to your advantage. But the reality is actually, as you both alluded to, things like consumer duty really fundamentally underpins the desire from regulators for consumer protection.

And that's it's a big ask and it's very outcomes focused. It's not the way firms are used to thinking about regulatory outcomes, and therefore it's actually very heartening to hear about the number of firms who are taking the cost of living crisis and actually thinking about how they help their own customers as well, that's great. But you know, also if you think about the bandwidth about what regulators are trying to do we see today the next consultation around the regulation of crypto assets coming out of Treasury, if that's in addition to the regulatory perimeter in scope, that's not a lot less that's very much more uneven.

Also, I think if we see changes which might make things a bit easier in the UK, there's a real issue around divergence. So for example, there's an open consultation around the disclosure, around retail investments, so the PRIIPs regime in Europe, you know, changing that for something that's more tech enabled, more realistic, you know, much better for UK consumers is great.

Any firm that has exposure to non-UK retail investment clients is also going to be having to maintain the existing European rules. So you've got a divergence approach and almost two regimes you have to tackle. So I think it's a real mixed bag. It'll be interesting to see where we get to over the year. I mean, there's a lot of progress that the government wants to make, so watch this space.

So moving on from sort of regulation then, thinking more around some of the negative predictions we've heard around potential recessions and so on over 2023, Isabelle how likely do you think this is? I think the question is, is not are we going to have a recession? I think the question is it's going to happen. It's about how long it will be and how deep it will be.

Now, what we're hearing back from all economists at PwC, and I'd love to get Charlotte's insight into it, is it probably will be shorter and less sharp than we than we thought, particularly around quarter three. With energy prices now not going up as much, there will be recession, but probably shorter and not as deep. Some of the snaps that we say that would come out from out of our economists, in a weekly food shop, the average weekly food shop is going up to £100. That's double what it was in 2000. UK house prices are likely to drop by 8%. We did some work in the middle of last year with Totally Money, and even at that time, you know, 30% of UK adults couldn't get access to mainstream financial services because of their credit ratings and unsecured household debt.

The average unsecured debt per household is over £15,000 now. So that, you know, gosh, that's really high. The labour market is tight and there are some signs it's flat lining, but there's still a labour shortage in, you know, in highly skilled services. And I think that comes back to the point Charlotte and I have made is that we still see a big focus in financial services actually, there are vacancies and there's a big focus on reskilling.

And obviously we're going to see a sharp fall in real wages and some analysis we completed last week shows that three quarters of people in the UK are worried about their mortgage and their rent payments and are therefore having to cut back on non-essentials and that obviously has an impact on the amount of spending they can do in the wider economy.

So so, you know, yes, I think, you know, I think the point for financial services is then how are they going to be ready to cope with it and what measures can they put in place to support both consumers and commercial clients? Yeah, I know, I agree. Definitely. Charlotte, does that kind of accord with your views around recessionary pressures? Yeah, absolutely. I think it's a really hot topic at the moment. And obviously yesterday we saw the IMF come out with their global forecasts and they basically said that the UK is the only major advanced economy to go into recession next year and some were close to but not quite, not quite in, say, Germany for example, just not falling into a recession.

But to give you some kind of context around why that is and linking in with kind of everything that Isabelle has said, GDP fell in Q3 last year and we expect it to fall again in Q4 2022. So we're kind of already in that. As we mentioned, it's not really about whether we're going into it, but how much it's going to continue, as Isabelle said, and also how deep that's going to be.

And so official data is actually released in about a week's time. So we'll see then if we've gone into a technical recession. But all the survey data is suggesting that underlying activity is weakening and points to us having entered in Q4 last year. And the reason for this is of course the high inflation and the fact that that took a bite out of consumer spending.

And because she with confidence is near historic lows and retail sales has fallen below the pre-pandemic level and business surveys suggest a contraction with the CBI’s Growth Indicator having fallen now for six consecutive rolling quarters. So we're really already seeing that coming through. And so yet the CBI’s forecast also predicts a recession this year, we expect GDP to contract by 0.4% in 2023 from growth of 4.5% in 2022.

However, exactly as Isabelle said it is worth noting that we expect this recession to be a relatively mild one. We expect the peak to trough fall to be around 7%. This is much smaller than past recessions, I mean, particularly compared with the financial crisis. So really something to kind of note and take away from from what we expect from this recession.

But I guess to give some insight into why we expect this recession to continue into 2023, and particularly given the fact that we expect inflation to come down, the squeeze on incomes due to high inflation, is set to lead to still a year long decline in spending and obviously that's going to impact economic growth. Now, inflation does seem to have peaked, but we expect it to remain high through much of 2023, though expected to end the year around 4%.

And naturally, that's going to come down as we do see food prices and energy prices come off of their peaks also, but still to remain higher than they have done in the recent past. And then this weakness is expected to weigh on other areas of the economy, depressing business and residential investment. And this isn't helped by the little support that we're seeing from global activity as well at the moment.

But to end on a slightly happier note, in 2024, the outlook starts to improve the GDP growing by 1.6%. And that's what we forecast is going to happen in 2024. And this is as the squeeze on household incomes abates, as inflation falls further. And then this will support private sector investment as global growth normalises. I'm just going to talk about a few key risks that we see as with forecasts.

And of course, there are risks that go alongside that. And the three main ones are the Ukraine war. And obviously any escalation out there could weigh heavily on GDP growth. And China is another one if they have any sort of hiccups with their reopening, any further lockdowns etc, this is likely to impact too. And then something we haven't seen for a while, and it's particularly important for the FS sector, title over global financial conditions that we're currently seeing, obviously bank rates gone up, not just in the UK, across the world., and we haven't been used to this. So it's just how consumers deal with that, how we kind of move into this new normal and how that feeds into economic growth too. Thank you, yeah, and it really is generationally very different for some people. So the people of my generation just haven't experienced this before. I mean, Isabelle, you talked a little bit about or we'd heard rumblings actually in the past of a potential tsunami of bad debt coming through.

And to some extent, I think this has been held up by some government measures. And as we said, some of the measures actually by our clients in terms of supporting consumers. But do you think that it's actually going to come to pass in 2023? It's really interesting, and when you look at the predictions and then the timescale with which they're sort of happening, and then let me explain what I mean.

So if we look at the CBI survey in quarter four, again, banks expecting that non-performing loans will increase and that that's quite a good indication about, you know, do we think we're going to see a credit crisis coming? But they'd also predicted that in quarter two and quarter three and those rises haven't actually happened. And obviously that's really welcome.

But I still think that credit risk is a real concern as we go into 2023. Now, as Charlotte said earlier, you know, over 70% financial services, and actually that's 90% of banks, already have put in place special initiatives to help their consumers and commercial clients with the cost of living, the cost of doing business. So that is really good.

The industry obviously is a lot better capitalised than it was in 2008. And actually a lot of the measures that have been put in place over the last 15 years have addressed that. So if we go into a credit crisis, where the industries are much better capitalised and ready to deal with it, they're already on the front foot about thinking about how they deal with customers, what measures they can puts in place.

And I think there is some concern, obviously, during codes and actually there were some, you know, the banks and financial services were very supportive. We saw payment holidays, we saw mortgage holidays, we saw forbearance on some consumer loans, we saw extra lending in the market, but quite a lot of that was government backed. So I think there is some concern in financial services about now what both consumer and commercial clients expectations are and how can financial services service those. So, hard to say because a lot of, you know, there's a little bit you feel like you're crying wolf because because we've had the indicators we haven't seen it coming yet.

I do think it is a big risk. It's good to see that the industry is on the front foot and is really thinking about how they'll deal with it. Great. Thank you. And just as follow up, I'm interested, obviously, the UK did a lot of good stuff during the COVID pandemic. Are you seeing the same sort of messages from your global clients?

Is there a differentiation between the UK's impact versus other parts of Europe or across the world? Or is it kind of a broad equivalent across the piece? A really interesting question. So if you went back to the COVID measures, actually, you know, those similar things were done in a lot of the big economies, so that's great. But you know, similar way in terms of government supporting lending, particularly to small to medium sized businesses.

We saw that in most major economies. You do see a slightly different cost of living crisis across the world. If you look at interest rates in the Western economies, we've obviously had a big jump in interest rates. You haven't seen the same maybe so much out into Asia where interest rates were already higher.

So I think, you know, yes, there's an impact globally, we're probably seeing it more in the Western markets. And I think that sort of, you know, the industry is better capitalised in terms of, you know, mainstream financial services. There's obviously lending that's now happened through sort of shadow banking. And it will be interesting to see how those organisations cope. We’ve got organisations that didn't exist in 2008.

You know, and we've seen the rise of the neo bank, and gosh, I wouldn't even call those start ups anymore because they are very mainstream. But, you know, Andrew, you were saying, you know, gosh it makes me feel old, but people of your generation haven't been through a major financial crisis maybe in their adult lives.

We've got a number of financial institutions that have not been through a major credit crisis, and it will be interesting to see how they cope and interesting to see really how some of their lending, and the lending they've been prepared to do, you know, how that really stands up as we come under pressure. Interesting. Thank you.

And if I put my regulatory hat on for a second, the other thing that I draw from this is people talk about UK international competitiveness and so on from a regulatory perspective, I think, you know, is it about having fewer rules? Actually having a robust regime is really important and actually this is the time where we're really demonstrating that we address capitalisation.

We're very focused on consumer outcomes, which actually makes us a much more competitive great place to be. So that's very interesting. I'm conscious time, but I'd love to hear a little bit of more about some sort of war for talent we're seeing. I mean, you both referenced the focus on people in tech space, in ESG, where I know competition is really fierce.

I mean, Isabelle, what are the winning firms doing right? So what's really interesting, and PwC run a global CEO survey and that came out in the middle of January, and we can get cuts of data both by global financial services and UK financial services. Even on a global basis, the survey indicates that financial services are ahead of other organisations in terms of reskilling and then actually deploying technology.

But it's that reskilling point for this conversation that's really interesting. And we did some work in the UK with the Financial Services Skills Council that looked at the benefits of reskilling rather than rehiring people with different skills. And we saw that came out, you know, really nice number, 49,000, you save £49,000 if you reskill a current employee rather than trying to look for somebody outside of the company with those new skills.

So I think FS are ahead on reskilling but it certainly doesn't mean we’re there, I think there's a huge amount to do but at least people understand that that is an issue. And the other thing I think that's interesting is actually how they are working in a business ecosystem. And I know some people feel that ecosystem word is a little bit overused, but, you know, if we look back and we look at the development of some of the fintech companies and areas that would really making use of new technology, and we're bringing people in different skills into the industry, there was a view of, you know, would the big legacy organisation over time just buy them up and absorb them? And actually we're seeing now much more of a partnership model. And I think that's really interesting. And certainly as you speak to people in sort of legacy financial services and understanding, whereas previously you probably would have expected to own the front to back customer journey, actually to say, ‘no, that's fine, I don't need to do that, but I need to have fantastic partnerships with people who really bring innovation and something I can't do and therefore make sure we're delivering a great service front to back’.

So on that point about talent and reskilling is this view that it doesn't all have to be in-house. Yeah, that's fascinating. I certainly I've had a number of conversations in the last week around how the new regulatory environment actually affords opportunities for people. But it is, as you say, those traditional players who perhaps have an existing client base.

But it's how you bring people to partner or form alliances to really address some of the needs we see there, brilliant, thank you. Charlotte any further observations that you think are particularly pertinent to the talent or skills investment area? I think the only thing I'd really say there is obviously, yeah, in financial services it's an issue and it does seem to be economy wide as well.

I mean with with a tight labour market at the moment and with the high levels of inactivity, we're kind of seeing that come from two specific things really. One is long term illness, so things like NHS backlogs within the UK, people actually exiting the workforce because of the fact that the things that didn't get dealt with during the pandemic tend to be impacting on, on their on their life now.

But also early retirement. We're seeing a lot of over 50 leave the workforce and probably making that decision in the pandemic, and that's influencing now through and other things such as Brexit, etc and impacting on the amount of people in the workforce that we're seeing now. So, yeah, I mean, the kind of the only not really a positive, but I guess business experiences of labour shortages and the fact that it's really impacting on firms at the moment, may lead them to retain staff more than they otherwise would have in any recession going forward as well.

And so we might actually see unemployment rate sort of peak at a slightly lower than we would have expected. I think we're expecting I think it's 5% at the end of next year and it's currently in at 3.7%. So that's similar to the pandemic. And so it's not too much higher, but obviously will have an impact.

But yet just sort of to give some context to that, I guess, in terms of the broader economy. Brilliant. Thank you. That was really useful. Thank you, Charlotte. And well, I'm conscious of the time, so we've absolutely flown 30 minutes there I'm afraid so we are out but so thank you, Charlotte. Thank you, Isabelle. That was a really interesting discussion.

I really enjoyed it, very helpful. To the listeners, for more insight and if you want to take a look back over our year in financial services, if you want to look at the latest survey results of the PwC and CBI survey or if you want logically more information on the Edinburgh Reforms and all things regulation, do visit the PwC and CBI websites and I hope we get to do another one of these soon because it's been really fascinating.

So thank you all.