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Optimism across financial services has decreased following the plateau in sentiment reported during the previous quarter. Taking an industry perspective, optimism appears split, with bankers and investment managers expressing a steep drop in their optimism levels while for insurers remain flat. This deterioration is largely driven by the continued uncertainty around Brexit and the possible impact of a no-deal Brexit on the pound and the market in general.
Across the board, financial services firms are continuing to invest and authorise capital expenditure on IT systems in order to improve efficiencies and speed, with spending on regulatory compliance continuing to be a focus area for firms.
On the people agenda, decreases in headcount are planned in the investment management sector and are set to continue for the next 3 months in the banking sector. Across the industry, the lack of availability of professional staff is reported as an important reason that will hinder the increase of business levels in the next 12 months, with almost half (42%) saying that it has been difficult to retain and recruit people during the last 12 months. In order to respond to that difficulty, 25% of them plan to change how and where they advertise the jobs and 21% will invest more in AI and in automation. Only 12% of them say that they will provide training and just a 7% will increase wages.
Looking deeper into the people agenda, our latest results revealed that the area in which all the sectors face acute skills shortages and recruitment difficulty is IT Technology (72%), followed by compliance/audit (35%) and risk management/actuarial/claims (34%). The key factors that will drive headcount changes are: technology driven efficiency gains (58%), business transformation (55%), regulatory compliance (51%), and Brexit (30%).
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After a plateau in the second quarter, optimism has declined further, now almost down to its lowest point since the Brexit announcement and at the same levels as in the financial crisis. Brexit is the key driver behind this decline as many of the banks continue planning or implementing their Brexit plans, need to plan and work hard to prepare for a hard Brexit and there’s a lot of concern about whether they will be able to get all the work done on time and ensure continuity for their full customer base.
Business profitability has remained flat with expected increases over the next 3 months. This increase will be achieved through the large cost reduction programmes banks have in place. Respondents report a significant drop in spending on property, underlined by the widespread consolidation of property both in terms of head office property and regional branch closures.
Driven by the their focus on cost reduction, banks report a decrease in headcount in the last 3 months, which will be further reduced in the next 3 months. This will be supported by investment in IT to help reduce headcount in a way that automates processes and increases efficiencies.
Launching new products and services and investment in IT systems and applications are seen as the key enablers of their growth for the next 12 months. In their effort to transform their business and become more efficient, banks will need people with technology skills, an area in which they expect to face skills shortages and recruitment difficulties over the next 12 months.
At the moment there’s a big dichotomy in the banking industry, on the one hand big legacy banks that have big customer database and on the other, new challenger banks that have new technology but haven’t got as many customers. To help bridge the gap, we are starting to see these established banks setting up new digital banks. This journey to reinvent themselves as digital banks and remain competitive is supported by our latest report published together with the Association for Financial Markets in Europe (AFME) in which we define the four innovative technologies that are going to transform the industry: Data and analytics; Cloud computing; Artificial intelligence; and Distributed ledger technology.
Optimism levels in the insurance sector have plateaued, driven by Brexit as well as international uncertainty
Profitability levels have increased significantly for life insurers and insurance brokers, while general insurers reported a steep drop. In terms of business volumes, insurance brokers reported a significant increase, for life insurers volumes remained strong, while for general insurers they were modestly positive and at the same levels as in the second quarter of 2018.
Investment in technology remains the main reason for capital expenditure across the industry over the next 12 months, but for different reasons:
General insurers face fierce competition by new entrants and that’s reflected on their high investment in IT. Due to historical lack of investment there’s a catch-up happening to meet consumer demands, deal with regulatory expectations, and compete with the more digitally agile new entrants.
For insurance brokers spending is focused on front office transformation, rather than on replacement of their back office systems. Customer experience is important as insurance broking is a people business and thus investment in customer driven technology is part of their strategy. What we see is that investments are continuously being made in customer centric technology which is bringing them benefits in terms of further growth opportunities.
For the life insurance sector investment in technology in order to improve efficiency and speed is top of their mind, because, as the rest of the insurance sectors, they are not agile and they have so much legacy systems. As we put it in our UK Life & Pensions: A roadmap to succeed in a fast-changing sector report, the sector needs to focus closely on customer engagement, sharpen its focus on core businesses and improve operational efficiency in order to protect margin and generate the cash required to build new capabilities.
In the life insurance sector there’s a fundamental change in business models as some life insurers look to reposition themselves as asset managers. To help accelerate this change and their position in market, life insurers plan to increase their spend on marketing activities, in particular around the development and launching of new products as well as branding and advertising, which are considered as key enablers for growth for them over the next 12 months.
Optimism in the investment management sector dramatically declined in the third quarter of 2018 with asset managers reporting declined profitability, reduced levels of business volumes and increasing costs overseas.
Asset and wealth managers are experiencing increased pressure on margins and regulation, like MiFID II, which has had a significant impact on their competitive profile by increasing costs. This gloomy picture is also explained by asset managers’ uncertainty around Brexit and concerns around delegation, which in the case of a no deal situation will have a significant impact on asset managers. There’s also a sense that the sector may be coming to the end of a period of favourable business conditions, which explains the significant decline in optimism.
Despite this pressure on profitability, investment managers have increased their workforces during the third quarter, with a slowdown in hiring expected over the next quarter. This increase in the numbers employed is explained by the fact that most asset managers are seeing an increase in unmanaged employee turnover levels from last year (recent data suggests circa 12% employee turnover rates mid-year).
As technology is set to disrupt all areas of the industry, asset managers report that they will continue to invest in technology for increasing efficiency and speed and for replacing their legacy systems.
Hiring people with digital skills is an area where asset managers expect to face a particular challenge in the next 12 months. The industry is starting to transform with new approaches to analysis and research bringing uncertainty to the traditional analyst role driven by increasingly digitised distribution platforms and channels and technology related efficiencies affecting back and middle office functions. This change is proving particularly challenging for investment managers as they try to attract new talent with new skills into the business whilst balancing and stabilising the existing workforce at a time of great uncertainty for those working in the industry.