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Confidence amongst financial services firms fell for a third consecutive quarter in the 3 months to September, with investment managers reporting the sharpest drop in optimism. Regulatory pressures and low interest rates remain a challenge for the sector with the UK’s decision to exit the European Union adding to the complexity of their agenda.
On the other hand, business volumes across the sector expanded at a good pace with profitability looking more positive than the previous quarter, despite being flat in banking. Overall income from fees, commissions & premiums expanded due to particularly strong activity from the insurance and investment management sectors. Overall employment numbers were steady, and the pace of hiring is expected to be varied across the sectors in the final quarter of 2016.
The level of competition remains the most significant constraint on business growth over the next 12 months. Firms continue to invest heavily in technology and digital platforms to transform their front and back offices, with the goal of providing greater efficiencies and speed.
Optimism amongst the banking sector saw little change, having deteriorated sharply during the first half of 2016. Volumes of business are up significantly as markets stabilise post the UK’s EU referendum. Total operating costs increased in line with expectations, with profitability remaining unchanged.
Employment fell sharply as banks continue trying to meet their cost reduction targets by year end, however headcount is expected to stabilise in the final quarter of 2016. Training expenditure is still growing with a continued focus on skilled staff.
Banks predict greater competition from new entrants within the innovation and FinTech space. There has been a drop in M&A activity post the referendum but is expected to recover. The survey results show that banks are shifting their focus towards retaining existing customers, supported by increased expenditure on advertising and branding.
Banks report that the EU referendum result had a negative general impact on their organisation, with the impact of market volatility particularly negative. Competition and regulation remain the largest barriers to growth in the year ahead and banks intend to invest more to tackle this. Banks have focused their efforts on reviewing the economic impact of Brexit and have plans to consider necessary operational and geographical changes.
Optimism remained unchanged for the fourth consecutive quarter within the General Insurance sector. Insurance as an industry is more positive compared to the banking and investment management sectors. Insurers predict levels of business to increase over the next quarter, particularly from private individuals. Profitability growth also increased sharply last quarter but is expected to ease in the next 3 months with a continuing push on the cost of claims.
General insurers continue to invest in employment and staff training. Spending on technology and marketing will increase further as they focus on reaching new customers, introducing new products and services and increasing efficiency across the business.
Life insurers expect a continued increase in valuable profitable new business. In contrast to the General Insurance market, they expect to reduce employment as a result of managing increasing operational costs and reducing pressures on margins. Life insurers will authorise capital expenditure in technology and prioritise growth through domestic customers over international customers.
Competition and regulation remain the factors most likely to limit business growth within the general insurance sector. These were closely followed by the availability of professional staff, which supports the continuing spend on training.
The investment management sector reported a steep fall in confidence last quarter, and at the fastest pace since December 2008. Although there is ongoing caution around market volatility, things have stabilised since June. Volumes of business have risen strongly, particularly from financial institutions, but are expected to flat line in the next three months. The sector saw profitability rise only slightly, further underlining the ongoing pressure on operating margins.
Employment numbers were flat for the first quarter since the beginning of 2012 as firms sharpen their focus on cost reduction. Spending on staff training also declined, but both are expected to edge up in the last quarter of 2016.
Competition is cited as a clear constraint on business growth in the year ahead for investment managers. As a result there is a much stronger focus on retaining existing customers, with spend on branding and CRM systems supporting this. There has also been a significant pick up in technology spend expected to streamline operations and deliver better client experience.
Investment managers are becoming increasingly worried about the level of demand and are trying to hold onto existing customers as a result. There are also concerns around legislation and regulation and capital expenditure on these areas continues to grow.
Following the United Kingdom’s decision to leave the EU, financial services firms have reported a neutral to negative impact on their short term business. The industry has been pro-active in communicating with staff, clients, investors and regulators. The vast majority of firms have undertaken, or plan to undertake, a thorough impact analysis exploring how Brexit will impact on regulation, business models, people, clients and competitors. Firms need to undertake this analysis to understand all the options available to them. Only then can they begin to form truly strategic plans.
Financial services companies see the impact on the economy and the ability to access EU markets as the main medium-term risks following the referendum result. While some firms appear optimistic about Brexit providing opportunities to make changes to the UK regulatory system, the need to maintain equivalence with key trading partners suggests this is unlikely to materialise. Firms also recognise the potential to use Brexit as an opportunity to accelerate transformational change within their businesses, including the deployment of FinTech solutions.