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Optimism among Financial Services has fallen slightly in the quarter to September, however this tells only part of the story. This tale of two halves highlights a divide in sentiment, with banking feeling much less optimistic than their insurance and investment management counterparts. Interestingly, this is despite widespread industry increases in business volumes, demand, and profitability, which the industry expects to strengthen over the next quarter to December.
Focus areas of investment continue to centre on IT, which is expected to rise at its fastest pace in over two-and-a-half years. This is supported by investment in land & buildings, which also features for the first time since 2014. The drivers for such investment activity remain unchanged, including both efficiency improvements and adhering to regulatory compliance, however this time also include investment to provide new services for customers. This is complemented by firms reporting increases in spend around brand and marketing suggesting a renewed focus on cross sales for new customers in an increasingly competitive marketplace.
Increasing legislation and regulation, competition, lack of demand, and availability of talent are highlighted by firms as the most likely factors limiting growth over the coming year. In fact, the threat around the availability of talent, especially overseas, has risen to its highest in over a year.
This is further underlined by responses to which factors are most critically important to ensuring the UK’s future as an important centre for financial services. Leading with innovation, firms consider remaining a hub of innovation and FinTech as most critically important, closely followed by promoting access to global talent and ensuring a focussed and agile regulation. These results support the findings of our recent report with TheCityUK “A vision for a transformed world-leading industry” which sets out a strategy and recommendation for the UK beyond Brexit.
Despite a relatively positive outlook across the industry, sentiment within banking has continued to deteriorate in the quarter to September. This lies in contrast to brisk growth in the sector around volumes and value of business as well as strong profitability, which firms expect to continue into the next quarter.
Competition remains a real challenge for banks, with most expecting competition from the industry itself and new entrants. In response, banks have maintained their interest in developing IT, in particular around increasing efficiencies and providing new services, as well as increased marketing budgets to drive cross sale revenue from their new and existing customer base.
Legislation and regulation remain the biggest limiting factor for growth within banking, with spend on responding to regulation forecast to increase over the next 12 months.
Optimism amongst the insurance industry is divided, with UK life insurers the most upbeat, supported by strong volumes of business over the past three months. By contrast, insurance brokers indicated a pause in business growth following four years of expansion, and general insurers business expanding at their weakest pace in over two years.
In line with other financial services industries, regulation and increasing competition remain consistent threats to business growth within insurance. This is perhaps explained by the challenging market conditions and changing landscape within as: brokers navigate soft market conditions, general insurers feel the tough economic climate experienced by their customers, and life insurers restructure to position themselves closer towards the asset and wealth management space.
Despite this challenging environment and industry wide concerns over the availability of available talent, it is reassuring to see both general and life insurers looking to increase headcount and all sectors maintaining their investment in technology to focus on productivity and the delivery of new services to domestic customers.
UK investment managers are feeling optimistic, suggesting strong business conditions resulting in increased fee income, growth in business volumes and profitability. Building on this strong performance, firms are continuing to invest in more staff, land and buildings to support ongoing growth and strategies.
Over the next twelve months investment managers anticipate total operating costs to rise, primarily driven by upcoming regulatory compliance as well as the development of new products and services. Unsurprisingly, investment in IT has continued to accelerate, now at its highest in over a year to help increase efficiencies and draw on the opportunities presented by regulatory compliance, such as reporting under MiFiD II.
Intense competition from new entrants as well as pressure from across the industry, including life insurers will continue to challenge investment managers. This pressure is leading firms to invest heavily in their brands and marketing as they focus on deepening their existing client relationships, a trend we expect to continue over the coming months.
UK Leader of Industry for Financial Services
Tel: +44 (0)20 7212 5193