CBI/PwC Financial Services Survey

Q1 2021 Results

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Leading the recovery

Financial services organisations are emerging from lockdown in a strong position to support economic recovery and take digital transformation to the next level. As optimism continues to grow, 2021 offers further opportunities to move forward and drive sustainable change.

“As the UK eases out of lockdown, our survey confirms that financial services organisations are well placed both to lead the economic recovery and boost their own competitive reinvention and growth. The businesses out in front recognise the importance of understanding what customers really value in this fast-changing marketplace and of securing organisational buy-in for the road ahead.”

Isabelle Jenkins Leader of Financial Services, PwC UK

Positive sentiment reflects a strong position

The positive sentiment across financial services (FS) reflects an industry that has demonstrated its resilience and value to society during a year of upheaval. While there are challenges ahead, it can now be a key engine of economic recovery in the UK.

Banking

Through investment, lending and advice, banks have a critical role to play in oiling the engine of recovery. The central challenge is how to direct capital in the most efficient way, while protecting balance sheets against what banks in our survey anticipate will be a rise in non-performing loans.

The good news is that the sector is emerging from lockdown in strong shape. Building societies (+94%) and banks are the most positive (+73%) of the sectors. Both anticipate a significant rise in returns ahead.

As banks look to target credit, it’s important to recognise that economic conditions vary markedly across sectors and localities. A clear case in point is the strong performance of local high streets in comparison to city centres. Traditional credit scoring may therefore not be enough as banks seek to sustain lending while protecting against bad debts. Sharper analytics can help to improve credit screening and detect early warning signs of default. Generous new capital allowances can also help to incentivise investment. Where banks are unable to offer credit, private credit funds and capital markets businesses can help to bridge any funding gaps.

“The survey results demonstrate the resilience of the banking sector. They also show how far and fast banks are moving to modernise their operational capabilities and develop new business models. While technology is clearly a critical element of this transformation, people are also central to success. Forward-looking banks are stepping up investment in upskilling, seeking to boost diversity and inclusion, and honing their strategies for the transition to a Net Zero economy. They are also looking closely at how best to support staff as they move to new hybrid ways of working.”

Mark Batten, Leader of Banking and Capital Markets, PwC UK

Insurance

Insurers have demonstrated their ability to be a force for good in society by providing stability and protection over the past year. As we ease out of lockdown, their contribution is set to be equally critical. This includes channelling pension investment and providing risk insight and protection during a time of heightened uncertainty and change.

Like banks, insurers have come through the past year in a strong position and are looking ahead to further increases in business volumes and returns over the coming three months. Share prices reflect this.

These firm foundations provide a springboard for transformation in business models and operational capabilities. The unfolding possibilities include always-on engagement, real-time risk management and ultra-fast claims processing.

Yet uncertainties and headwinds remain. New regulation continues to be a prominent concern. This reflects significant changes in areas ranging from pricing to sustainability and financial reporting. While claims have fallen overall, business interruption insurance presents a financial, regulatory and reputational challenge.

*Results in the above graphic relate to General Insurance

“The latest survey results reflect the strength and confidence of the UK insurance sector. This gives them an unprecedented opportunity to take control of their future. It also puts them in a strong position to be an even greater force for good in society. But there are headwinds to navigate, including a new wave of regulation, shifts in talent demands and increasing expectations on sustainability and social inclusion.”

Alex Bertolotti, Leader of Insurance PwC UK

Investment Management

Both through traditional funds and the ample dry powder held by private markets investors, investment managers can play a decisive role in driving the economic rebound, while boosting fund returns. This includes helping to support the turnaround of the many companies badly affected by the pandemic, but with strong long-term potential.

Investment managers are ideally placed. The confident outlook demonstrated throughout much of the past year continues. They anticipate further rises in business volumes and returns over the coming three months.

Prominent headwinds include regulation – number one on investment managers’ list of disruptors. The increased demands include EU environmental, social and governance (ESG) fund classification and reporting. As alternative allocations increase, there is also the regulatory and reputational challenge of how to boost yields while safeguarding retail investors from the risks of illiquid and potentially more volatile assets.

As the survey underlines, investment managers are stepping up the launch of new products and services to meet changing customer demands and jurisdictional preferences. However, it’s clearly important to manage the associated costs. This expansion also increases governance demands in areas such as ESG and retail investor protection.

“ESG performance now ranks alongside financial returns in securing investment. This focus opens up opportunities for differentiation and winning new mandates. It also reinforces investment managers’ contribution to creating a more sustainable and socially inclusive economy. However, there are important challenges ahead, including redefining investment selection criteria for this new world and securing the data and expertise to support this.”

Elizabeth Stone, Leader of Asset and Wealth Management, PwC UK

Priorities ahead

  • Focus clearly on what customers want from financial services and their preferences for how it should be delivered.
  • Rethink delivery and customer engagement. For example, the past year has shown how video conferencing with customers offers face-to-face engagement while enabling staff to serve more customers in a more convenient way.

  • While implementing new technology is key, knowing how to use it is just as important. Make sure upskilling and reskilling strategies are prioritised and underpinned by clarity on future demands and roles within your organisation.

  • Take employees with you. Many are fearful of digital transformation and its possible impact on their jobs. This underlines the need for a clear articulation of the benefits for them, including less mundane work and more fulfilling careers.

Turning ESG intentions into actions

What the results say

  • More than three-quarters of FS organisations (78%) report that ESG issues form part of their business’ objectives, with a further 17% planning to incorporate them.

  • Regulation, societal expectations, shareholder demands and alignment with customer priorities all rank highly as drivers for action around ESG issues.

  • 68% of organisations cite constraints on internal resources as the biggest barrier to delivering their ESG agenda.

Many FS organisations now find that their ESG record is coming under as much scrutiny as their financial performance. As ESG continues to move up the strategic agenda, navigating its many challenges and making it a top priority within senior management will be critical in turning good intentions into tangible progress. 

One of the main challenges is that ESG covers such a broad sweep of issues stretching from sustainability to social inclusion. Drivers for action are also wide-ranging and business priorities equally broad. Over three-quarters in our survey cite climate change, diversity and inclusion and corporate social responsibility as top priorities on their ESG agenda.

Additionally, FS organisations not only need to focus on their own operations, but also where they invest and how they contribute to delivering stakeholder priorities. This pressure on multiple fronts requires an allocation of financial and senior managerial resources that most admit falls short. 

A lack of clarity and consistency in what defines ‘green’ or socially inclusive investment and how this should be measured and reported compound the challenges around ESG. Regulation provides a basis for classification but most currently rely on self-certification. This creates difficulties with comparison and potential confusion among investors. It also heightens the risk of being called out for ‘greenwashing’.

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Banking

By channelling capital into green investments and helping businesses fund their transition to net zero, banks will be at the forefront of forging a greener economy in the years ahead.

More than 9 out of 10 banks (96%) cite ESG as an important part of their purpose. Commercially, this presents an opportunity for the UK banking sector to define a new role in the world and emerge as the pre-eminent global centre in the fast-growth arena of green finance. 

This is a fundamental shift in strategy and purpose. Bringing ESG into the core requires full alignment with strategy and embedding into day-to-day decision-making from the top levels through to customer facing and support functions. Setting up dedicated teams at arms length from the rest of the business is not enough. Some of the choices will be difficult including what sectors to invest in and which holdings to divest. At the same time, this is a chance to drive real innovation and deliver lasting impact.

Insurance

Insurers recognise that ESG is a commercial opportunity, enabling them to stand out from the pack, both in where they channel investment and how they contribute to society.

Being able to create and clearly demonstrate long-term value is key. Increasing momentum around this will help establish insurance as an important force for good, rather than something where its value is only really evident when things go wrong.

Investment Management

The shake-up of investment management driven by ESG is already well advanced. While some FS organisations see regulation as the number one motivation behind their ESG agenda, the foremost driver for investment managers is alignment with investor priorities, pointing to a fundamental shift in strategy that goes beyond compliance.

The resulting strategic choices for investment managers include determining whether they want to be leaders on ESG or tactical followers. It’s also important to bring together the data, expertise and governance structures to support these key strategic priorities.

Priorities ahead

  • Ensure that the allocation of resources and level of senior management direction reflect the central importance of ESG to strategy and performance.

     

  • Set clear criteria for defining ‘green’ and socially inclusive investments and consistent industry-wide standards for measurement and reporting. 

Capitalising on platform potential

What the results say

  • FS organisations are stepping up engagement with both FinTech and BigTech firms as part of the wider FS ecosystem.
  • FinTech to become an increasingly important part of long-term business functions, with the front office, operations and cyber security leading the way.

The acceleration in digitisation and increase in Application Programming Interface (API) connectivity is driving innovation and paving the way for the move to collaborative platform delivery models.

Platform delivery is a potential game-changer, opening up access to new capabilities and innovations. FinTechs can be either partners or competitors, possibly even both. Leading FinTechs and challengers are also now setting the standard for agility and speed to market. FS organisations recognise that they need to keep pace.

Banking

Banks are the most likely of the sectors in our survey to be actively partnering with FinTechs, with further collaboration planned. Harnessing FinTech innovations is an opportunity to reduce costs and improve customer experience. It could also lay the foundations for a banking-as-a-service model. Under this approach, banks would primarily focus on customer understanding and relationships and provide access to the most appropriate products and services.

Insurance

InsurTech is already well-embedded within insurance, opening the way to move to an ecosystem model. 

The potential benefits of platform delivery include going direct to market and tapping into hard to reach segments such as millennials. When aligned with innovations in areas such as wearables and Internet of Things sensors, this is also an opportunity to create an always-on customer relationship and move into adjacent markets.

Investment Management

Investment managers already make use of multiple outsourcers. FinTech partnership fits easily into this model. At a time when face-to-face interaction is limited, the FinTech contribution includes helping firms to conduct distanced business while still creating a compelling customer experience. The move to an always-on platform model would enable investment managers to develop richer and more revealing insights into financial behaviour and needs, which they can turn into more precisely tailored products.

Priorities ahead

  • Clear away remaining legacy systems and move all technology infrastructure onto the cloud.
  • Identify what the business can offer that others can’t and build on these strengths. This could be customer insight and experience as well as specific products and services. Non-core or low margin offerings can be delivered by best-in-class partners.
  • Learn from the agility of FinTech partners. It’s not just innovation teams that need to adopt agile ways of working, but also risk, compliance and internal audit teams. Many of these second and third line operations are struggling to keep pace with the fast ‘sprints’ being adopted by frontline colleagues. Integrating them into development from the outset would help to address this.
  • Partnership selection and management should be a core capability. While full acquisition offers exclusivity and control, there’s a risk of stifling agility and creativity within large corporate structures. We’re therefore seeing a switch towards more minority stakes and joint ventures.
  • Learn to let go. Moving from a proprietary to a partnership model is as much a cultural as a technological shift, which requires new ways of thinking and judging success.

Becoming more cyber secure

What the results say

  • More than half of FS organisations (53%) expect to invest more in cyber security over the next 12 months.
  • The top priority is improving ways of reporting and mitigating cyber security risks, closely followed by improving detection, responding to new/emerging threats and aligning cyber investments with overall business goals.

Heightened vulnerability to cyber risk is the inevitable result of increases in digital engagement, remote working and platform delivery. This is also an area in the regulators’ sights, both from a data protection and operational breakdown perspective.

The level of anxiety is highlighted by the fact that cyber risk tops the list of threats to growth prospects for FS leaders taking part in the latest PwC CEO Survey, ahead of regulation and uncertain economic growth.

With the usual perimeters disappearing, FS organisations need new ways of managing and protecting their businesses and their customers. They’re only as strong as their weakest link, which could be a poorly protected ecosystem partner or someone working from home. The challenge is to strengthen safeguards without compromising customer experience, operational agility and organisational collaboration.

Priorities ahead

  • Build cyber security into business strategy and transformation plans.
  • Carry out a risk assessment for cyber vulnerabilities and protection within your supply chain and delivery ecosystem.
  • Secure remote access infrastructure with steps such as multi-factor authentication for all users and more frequent vulnerability scanning and patching.
  • Harness the latest technology to ensure protection is secure but unobtrusive. Examples include using behavioural analytics and location tracking to identify anomalous activity.

Rethinking real estate

What the results say

  • 36% of FS organisations define ‘remote working’ as the majority of staff working away from the office 60-90% of the time, while 34% say it’s 10-40% of the time.
  • 73% believe the role of the office will change to facilitate greater hybrid, flexible working, with 66% stating they will be utilising more space for collaboration activities.
  • Around two-thirds (67%) plan to redefine or reconfigure their use of existing office space, while 59% plan to reduce it.

New working models

A shift towards remote working tops the list of changes brought about by the COVID-19 pandemic (84%). While definitions of remote working vary across FS, it’s clear that the role and use of office space is changing. As long-term hybrid working models begin to take hold, there can no longer be a one-size-fits-all strategy for developers, owners and managers of real estate.

Landlords and tenants working together in new ways to reconfigure and optimise use of space is critical. For landlords, it’s particularly important to get closer to tenants to understand and respond to their particular needs.

Heightened ESG expectations

Underlying developments coming to the fore include rising expectations on ESG from both investors and tenants. High specifications on ESG are set to become increasingly crucial in attracting and retaining tenants. While sustainability is also critical, ways of boosting social inclusion and community cohesion as part of development and regeneration plans are also important.

“ESG is now a key benchmark for investment and occupancy. Real estate businesses will lose out on investment if their ESG performance falls short of expectations. Tenants are also now looking for high sustainability specifications in judging where to locate and the services they demand. While the E in ESG is clearly critical, it’s also important to focus on the S through support for business and regeneration and the G through effective measurement, monitoring and reporting.”

Angus Johnston, Leader of Real Estate, PwC UK

Priorities ahead

  • Rethink the purpose of the office and work with occupants to meet their changing demands.
  • Landlords and occupants need to work together on ESG as part of strategies to operationalise ESG and deliver mutual goals.
  • Effective ESG measurement and reporting are critical. The EU’s new Sustainable Finance Disclosures provide a useful starting point.

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Isabelle Jenkins

Isabelle Jenkins

Leader of Industry for Financial Services, PwC United Kingdom

Tel: +44 (0)7711 773030

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