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Optimism amongst financial services was flat, having fallen in recent quarters, while growth in business volumes appears to have stalled. Profitability was also stable, following strong growth over the last year.
Financial services firms remain focussed on increased levels of IT investment in order to increase efficiency and manage their operational cost base. Despite this, they keep increasing their headcount, generally to support their growth plans and ongoing regulatory compliance efforts.
Continued investment in IT systems and applications also supports their growth plans which are focussed around selling existing products to new customers or cross-selling to existing ones rather than launching new products to the market. They are also increasingly looking toward strategic alliances to help in acquiring new customers.
Firms expect regulatory spending to continue to increase over the next 12 months and is currently marked as their most important barrier to growth. Reflecting on GDPR, 67% of financial services firms feel confident and 29% very confident about meeting the practical demands of the regulation, which captures the significant time and investment companies have made.
Brexit continues to drive uncertainty in the market. The announcement of a 21-month post-Brexit agreement has had a mixed response with just over half of those asked (53%) expecting it to reduce general economic uncertainty for the year ahead (versus 37% who disagreed). However, only one in ten firms (12%) felt the announcement has increased their confidence to invest in the UK (people, technology, etc).
Regarding their contingency plans, although a majority of firms believe that the transition agreement allows more time for implementation, they don’t believe that it has a fundamental impact on their plans as they need to prudently plan on the expectation of a hard Brexit.
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After a significant and continuous decline over the last four quarters, optimism has plateaued. This is in line with flat business volumes and profitability.
While 66% of the bankers appear to be confident regarding the implementation of their Brexit contingency plans and 66% of them agree that the agreement reduces the general economic uncertainty over the year ahead, the industry saw the level business with overseas customers plummet this quarter which may be an indication that Brexit has started to have an impact on customer choice.
Despite turbulent times in the sector, banks significantly increased their investment in hiring new people and focus on training.
Banks are feeling a lot of competition and a lot of pressure; they need to develop new systems, new services and have better digital interfaces for customers. At the same time they still have to deal with a lot of regulatory requirements (eg MiFiD II, GDPR, PSD2), which means less money and less people to do what they want to do.
With digital technology’s dramatic impact and in view of the changes, possibilities and opportunities that Open Banking is bringing about and the entrance of non-traditional providers of services, banks plan to invest in their own digital channels to face competition. They need to offer competitive products and services supported by efficient IT function, and this is a key priority regarding their spending over the next 12 months.
Banks will keep focussing on forming strategic alliances with particular interest in M&A transactions, which has picked up following a decline over the last 2 quarters. According to our recently published Open Banking survey banks recognise the disruptive potential of Open Banking and are treating it as a critically important strategic topic considering the possibility of complementing their offerings through partnerships with FinTechs.
In line with previous quarters, organic growth activities such as acquiring new customers and cross-selling to existing ones are main elements for growth over the next 12 months.
Statutory legislation and regulation continues to be seen as the most important factor limiting their ability to increase their business levels, while regulatory compliance spending levels will grow at the same pace as in the previous quarter.
Insurers are facing a tough competitive environment and will keep investing significantly in people as well as technology in order to provide new services and increase efficiency.
Looking at general insurers, optimism slightly improved together with business volumes which are expected to further increase in the next 3 months. After a spike in their headcount last quarter, hiring has stabilised, in contrast to all the other financial services industries. General insurers reported the lack of available professional staff as their most important barrier to growth.
Insurance brokers’ sentiment plummeted this quarter, although profitability levels went up and are expected to rise further in the next quarter. Given the tough competition they face, they continue to increase their headcount and will keep investing in technology in order to increase efficiency and speed and reach out to new customers.
Spending for regulatory compliance will continue to grow at a rapid pace over the next year, for both general insurers as well as insurance brokers.
Growth is expected to come from cross-selling to existing customers. In insurance broking, we also see an increased interest in pursuing growth through M&A transactions and by forming new alliances.
After a significant decline last quarter, investment managers’ optimism levels have stabilised, driven by increased profitability and a focus on operating costs. This improvement in business profitability also looks set to continue for the next 3 months.
With Brexit creating uncertainty about the UK’s ability to continue to attract global financial services talent and technological disruption requiring more diverse skill sets, it’s not surprising that the people agenda ranks very high this quarter. Investment managers are leading the Financial Services sector in their investment in hiring and training (which will continue over the next 3 months) as they regard the shortage of labour and the availability of professional staff as the most important limitations for their growth.
AWM firms will keep investing heavily in technology for the next 12 months to increase efficiency. With artificial intelligence, robotics, big data, blockchain and new Fintech entrants transforming the financial services landscape AWM firms must invest in new technology to compete in the new age.
Looking ahead, investment managers are focussing on acquiring new customers from domestic markets rather than on new product launches (there is a desire to consolidate portfolio offerings to reduce cost).
Firms in the AWM sector reported a significant decline in planned land and building investment, reflecting the general trend of companies moving towards a more flexible and mobile workforce to reduce costs.
After a surge in recent quarters, growth in planned regulatory spending over the year ahead eased to its slowest for two years, with firms in the AWM sector focusing on embedding regulatory change in their business as usual.