Brexit the most serious threat to UK’s status as financial centre – CBI / PwC financial services survey

Around 90% of the 92 UK Financial Service (FS) firms polled in the latest CBI/PwC Financial Services Survey, said Brexit uncertainty was the most serious threat to the UK’s position as a leading global financial centre.

Companies also said the UK’s physical and digital infrastructure lagged behind other advanced economies, while an increasingly complex tax regime and the gold-plating of international standards also threatened the UK’s global competitiveness.

While current business conditions saw moderate improvement, general optimism in the FS sector fell in the three months to December - the third consecutive quarter in 2017 – and rounding off two years of continuous flat or worsening sentiment, the CBI/PwC FS survey found.

The quarterly survey of 92 firms found that optimism about the overall business situation in the financial services sector fell significantly, having declined in seven out of the last eight quarters. However, the subdued mood last quarter was not universal: while banks, building societies and general insurers were decidedly less positive than three months earlier, finance houses, life insurers and investment managers felt more optimistic.

Growth in overall business volumes slowed for a second consecutive quarter, though conditions varied across the financial services sector. Volumes were unchanged in banking while building societies reported that volumes rebounded after falling in the previous quarter. Meanwhile, providers of specialist finance, life and general insurance, and investment management continued to report robust demand growth.

Looking ahead, overall business volumes are expected to pick up a little over the coming three months, with a similarly mixed picture across sectors.

 

Rain Newton-Smith, CBI Chief Economist, said:

 

“With overall business levels seen as broadly typical, and demand and profitability continuing to expand, the financial services sector ended last year on a stable footing.

 

“Scratch the surface, however, and a different story is revealed. Optimism in parts of the sector has been falling for the last two years, whilst firms are nearly unanimous in voicing their concern about the damaging impact of Brexit uncertainty and the need for the UK to remain a vibrant centre of FinTech and innovation.

 

“To restore some confidence, financial services firms absolutely must – no ifs, no buts – get as much certainty as possible on what the UK is aiming for in the Brexit negotiations, the opportunities of success and the consequences of failure.

 

“The never-ending burden of regulatory changes is slowly sucking the life out of financial services firms, and has repercussions far beyond the Square Mile. It puts a dent in the wider economy by acting as a drag on productivity, and consequently, living standards.”

 

Profits in the sector as a whole continued to improve, although at a pace significantly below expectations, with growth in profits is generally expected to remain similar in the three months ahead.

Employment dipped, having stagnated in the previous quarter, with firms planning to keep headcount stable in the three months to March.

Looking to the year ahead, financial services firms continue to plan for higher spending on marketing and IT, but expect to cut back in other areas of capital spending. Efficiency improvements remained the most important driver of investment, though the share of firms looking to expand capacity also rose. The main brake on investment spending remains inadequate net returns, with citations well above average and rising to the highest since 2015.

 

Commenting on the survey results, Andrew Kail, Head of Financial Services at PwC, said:

 

“The UK is set to leave the EU exactly 14 months from today. A transition period is likely, but ultimately the financial services sector - a critical part of the economy - must prepare itself to operate without membership of this key trading market. The industry will need to take positive action if it is to preserve its trading status and business model.

 

“There is much activity in boardrooms despite the question mark over trade negotiation outcomes. In the coming months we can expect to see more detail on companies’ updated contingency planning.

 

“However, Brexit is just one issue the UK financial services sector is grappling with. Investing heavily in technology to improve efficiency and the customer experience, preserving profitability in light of falling margins, and regulatory demands such as Open Banking and PSD2, Mifid II and GDPR are also high on the agenda. How the industry deals with this myriad of challenges will be pivotal to future success.”

 

Key findings:

  • Optimism in the financial services sector dropped noticeably, the seventh quarter of declining sentiment in the last eight quarters (the exception was the first quarter of 2017, when sentiment was flat). This marks the longest period of falling sentiment since the global financial crisis of 2008.
  • 13% of firms said they were more optimistic about the overall business situation compared with three months ago, whilst 35% were less optimistic, giving a balance of -22% (compared with -6% in the quarter to September).
  • 19% of firms said that business volumes were up, while 12% said they were down, giving a balance of +7% (down from +13 in the quarter to September).
  • Looking ahead to the quarter to March, growth in business volumes is expected to pick up somewhat: 17% of firms expect volumes to rise next quarter, and 3% expect them to fall, giving a balance of +14%.

Challenges to UK’s position as a leading global financial centre:

  • Concerns about the impact of Brexit uncertainty on the financial services sector shows no sign of abating. Nine out of ten firms (91%) cited it as the most serious challenge to the UK’s position as a leading global financial centre.
  • Companies are also concerned that the quality of infrastructure in the UK is lagging behind peers, with 53% ranking the UK’s physical infrastructure within their top three concerns, while a similar share (47%) pointed to the UK’s digital infrastructure. More than a third (37%) of firms listed the UK’s gold-plating of international standards within their top three concerns, with 32% citing the UK’s increasingly complex and unpredictable tax regime, and 26% pointing to increasingly restrictive and costly immigration policies.

Ends.

Notes to Editors:

The December 2017 Financial Services Survey was conducted between 14th November and 11th December 2017. 92 firms replied.

A ‘balance’ is the difference in percentage points between the weighted percentage of firms answering that output is “up” and the percentage answering “down” (for example, if 30% of firms say that output is up, 60% that it is unchanged, and 10% that it is down, the balance statistic is +20pp).

Across the UK, the CBI speaks on behalf of 190,000 businesses of all sizes and sectors. The CBI’s corporate members together employ nearly 7 million people, about one third of private sector-employees. With offices in the UK as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world.

Ends.

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John Compton

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