CBI PwC Financial Services Survey

Q4 2018

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Optimism in financial services continues to decline

Optimism in the financial services industry decreased further in the fourth quarter of 2018. Taking an individual industry perspective, optimism appears split, with insurers being more upbeat than bankers and investment managers who expressed a steep drop in optimism. Investment managers in particular are painting a gloomy picture this quarter, fuelled by more immediate market changes, such as a falling stock markets, political uncertainty and regulators’ pressures.

This deterioration in optimism is largely driven by sustained Brexit and political uncertainty, the challenging market conditions, the continued low interest rate environment that creates reduction in margins, and ongoing regulatory pressures. In order for financial services firms to succeed they need to redefine themselves, to be clear on their product and distribution, invest in digital across all channels and reduce their cost base. At the same time they face intense competition, including a mix of existing competitors, new entrants from within the industry and the technology companies coming into the industry.

Top 5 challenges facing financial services in 2019

The financial services industry is undergoing unprecedented change driven by innovation and technology while facing challenges from Brexit, regulatory environment, market conditions, and global events. For 2019 Financial services firms reported that the top 5 challenges they will have to navigate are:

1. Macroeconomic uncertainty
2. Regulatory compliance
3. Brexit
4. Financial market instability
5. Making better use of data to improve customer experience and business performance

Download the full survey results



What are we seeing in the market?

Apart from a further deterioration in optimism bankers report a relatively positive picture this quarter with:
- stable business volumes for third quarter in a row,
- improved profitability after a fairly flat six months, which is expected to stabilise in next quarter
- falling fees, commissions, flat net interest earnings and low margin environment, which has been the case for the past year,
- stable total and average operational costs. Banks stand out amongst other financial services sectors as a result of the consistently strong focus on cost management over the past three years. This has helped dampen the rapid increases seen in other sectors, however is expected to increase further next quarter as a result of Brexit and the need to set up new operating units in Europe.


On the people agenda, headcount was stable and is expected to increase significantly in the next quarter in order to meet Brexit requirements, as they need to employ more people to staff their European entities. Bankers also reported that recruiting talent is the second most pressing challenges they will be facing in 2019 closely behind macroeconomic uncertainty.

Looking forward

Competition is the key factor cited as limiting banks ability to increase business levels in the next year with 98% of the respondents indicating that they see their competition coming from the financial services sector including new entrant banks.
Responding to the increasing competition they face, banks plan to increase their marketing spending significantly in the next 12 months. Their focus will be on acquiring new customers, cross-selling to existing customers, and increasing their market share in domestic markets. In order to do that, they invest in sales force and distribution channels as well as IT systems and applications.
Spending in IT, which was already strong in the previous quarters, is expected to increase further aiming at increasing efficiency and speed and is the main reason for capital spending.
Regulation is considered to be third among the top challenges banks will face in 2019 as well as the major limit on business expansion in the year ahead, but compliance spending is stable overall.


What are we seeing in the market?

- Optimism in insurance is holding up better compared to other financial services sectors. The main reason being that they don’t see as much competition and disruption happening in their business models (except for life insurance) as experienced in other sectors where challenger banks, funds and fintechs are challenging established firms’ market share. Despite this optimism, insurers expect more competition in the next one to two years.
- Business volumes are up across all the three insurance sectors, and once more they were the only financial services sectors reporting growth this quarter.
- Profitability was high in life insurance as well as in insurance broking, which seems to be un-impacted by the rising claims costs.
- Declining profitability in general insurance for a second consecutive quarter, driven by rising costs and the high profile worldwide losses including major climate events (eg hurricanes), wildfires, etc. As a result, many insurers foresee FY2018 as a loss-making year.


On the people agenda, headcount was down and is expected to decrease further in the coming 3 months both in life and general insurance. This is because of greater use of outsourcing as well as their strong investment in information technology to improve front-end customer experience, which is also leading to headcount reduction.

Looking forward

Life insurers plan to increase their spend on Marketing significantly in the next year and the main reasons for that are: 1) while they keep growing their protection business, they are also moving into the mass wealth and are expanding into the savings and pensions market through their asset management tie ups, and 2) they are launching new products, for example around retirement solutions and long-term care, which are going to be very important for them in the future with an aging population.
Competition is considered as a key factor likely to limit insurers ability to increase business levels for the next 12 months. 41% of life insurers and 31% of insurance brokers report that they see this competition coming from other sectors in the financial services industry, this is because of the blurring happening between asset management, traditional fund management, wealth and life insurance and savings and pensions players.
Spending on regulatory compliance is going to be significant in the next year due to the ongoing impact of GDPR, Brexit, IFRS17, and the FCA which is doing a lot of investigations into fairness and price comparability.

Investment Management

What are we seeing in the market?

The picture in the investment management sector was gloomy during the last quarter of 2018, with:
- further decline in optimism levels,
- present level of business being below normal, while further decline is expected in the next quarter,
- both income from fees and commissions reported as down since last quarter,
- total and average costs rising at the fastest pace since the financial crisis,
- profitability falling for a second quarter in a row and with another decline expected in next quarter.


Asset and wealth managers are experiencing significant pressure on profitability and are also dealing with unparalleled challenges and developing opportunities presented by intense fee pressures, product innovation and  changes to distribution channels; all of which is consistent with our recent ‘Asset & Wealth Management Revolution - Pressure on profitability’ report.

On the people agenda, they report positive numbers in hiring during this past quarter with similar expectations over the next 3 months.

Looking forward

Asset managers’ spending focus in the next year will be on increasing efficiency, speed and reaching new customers. Spending for legislation and regulation, although significantly down since last quarter, remains a priority.

Asset managers report that we will see more M&A activity in the next year, as managers seek to take out costs, enhance their scale, acquire expertise in new asset classes, and gain access to new distribution channels and markets. We have seen M&A activity increase since 2017 and we believe it will continue to accelerate with more consolidations. As we predict in our ‘Asset & Wealth Management Revolution - Pressure on profitability’ report active managers that operate independently and fail to provide a clear value proposition to their clients or occupy a niche will be targets. Market leaders have already started to position themselves by acquiring vertically, horizontally or both, while building out their product and geographic reach.


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Andrew Kail

Leader of Industry for Financial Services, PwC United Kingdom

Tel: +44 (0) 7703 459 443

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