Reducing the cost of regulatory compliance should be the new Conservative government’s priority for financial services, according to firms in most sub-sectors (including banking, building societies and life insurance). Tax stability was also ranked highly and was the number one concern for general insurers and investment managers, according to the latest CBI/PwC Financial Services Survey for the three months to June.
Trends in financial services incomes varied, with the value of fees, commissions and premiums falling from the previous quarter, weighed down by poor results among banks and building societies. However, net interest, investment and trading income continued to grow at a healthy pace.
Meanwhile there was a sharp increase in total costs, but non-performing loans continued to fall and firms managed to keep average costs under control. These factors, combined with decent growth in business volumes, meant that profits increased at their fastest pace since March 2011, and rose across all sectors.
Overall business volumes are expected to grow at a slightly faster pace next quarter and profits are predicted to increase in most sectors, with the exceptions of banking and building societies.
Rain Newton-Smith, CBI Director of Economics, said:
“Demand for financial services continues to strengthen, with profits holding up and employment showing signs of an improving trend.
“But the cost of regulation and tax uncertainty are a top concern for firms across the sector. They want to see the Government focus on keeping the UK a competitive financial centre by not putting UK firms at a disadvantage.
“Meanwhile, in the Eurozone, negotiators need to move quickly towards a new bailout programme that secures Greece’s finances for the long term, but is also realistic in terms of Greece’s ability to pay and carry out meaningful structural reforms.
“Looking ahead financial services businesses are planning to ramp up their marketing spend to try to reach new customers, as competition from new entrants and from other sectors intensifies.”
Kevin Burrowes, UK financial services leader at PwC, said:
“Levels of optimism amongst banks remains broadly unchanged this quarter which is a little surprising as we had expected to see a bounce from the election result and the greater encouragement for financial services from the new government. However, ongoing regulatory uncertainty, the EU referendum and other macro-economic factors have dampened the outlook at least in the short term.
“In recent years, banks have enhanced many of their customer-facing operations with digital solutions, most notably through the introduction of mobile apps. The next wave of innovation lies in the digitalisation of the back-end processes, many of which still rely on a high degree of manual processing. Ensuring a continued spend on core IT is critical to the success of banks.”
Employment
Employment in financial services edged up a little. Headcount in banking was stable, with most other sectors reporting a healthy increase and only securities traders reporting a fall. Overall numbers employed are expected to increase at a similar rate next quarter.
Investment
Financial services firms plan to increase spending on marketing in the next twelve months as they try to reach new customers. But capital spending plans have been scaled back, with expected growth in IT investment the weakest in a year and a half and firms reporting falling capital budgets in other areas.
Business constraints
Intensifying competition was seen as the most significant factor likely to constrain business activity in the next twelve months. Competition is increasingly seen as coming from outside firms’ own sectors. Dealing with statutory legislation and regulation was seen as another important factor likely to constrain business activity in the next twelve months.
Productivity
Firms were asked to what extent they thought the Office for National Statistics data showing a slump in productivity in financial services and insurance, was true. While banks, securities traders and life insurers overwhelmingly believe that output per employee has fallen or grown more slowly, finance houses, general insurers and investment managers did not agree. Banks and life insurers said an increase in “non-productive” activities, such as regulatory compliance, was the most important explanation of this trend, whereas securities traders blamed “labour hoarding”.
Key findings:
• When asked to rank their top priorities for the new Government firms said it should be:
1. Reducing the cost of regulatory compliance.
2. Ensuring tax stability for the financial system.
3. Promoting financial literacy among households and businesses.
• 33% of financial services firms said they were more optimistic about their overall business situation than three months ago, while 1% said they were less optimistic giving a balance of +32%. That compared with +50% in March.
• 35% said business volumes increased in the three months to June, while 17% said they decreased, giving a balance of +18%
• Next quarter 41% of firms expect business volumes to increase, while 2% expect them to decrease, giving a balance of +39%.
Incomes, costs, profits:
• Income from fees, commissions and premiums decreased (-20%), after a solid rise (+46%) in the previous quarter. Growth is expected to return next quarter (+28%)
• Income from net interest, investment or trading income increased (+34%), at a similar pace to the previous quarter. It is expected to grow at much slower rate next quarter (+6%)
• Total operating costs increased (+47%), but the value non-performing loans decreased (-42%) and average costs decreased slightly (-7%)
• As a result, profits grew at their strongest rate (+61%) since March 2011 (+62%).
Employment:
• 24% of financial services firms said they had increased employment, while 11% said headcount had fallen, giving a balance of +13%. Employment is expected to increase at a similar rate next quarter (+12%).
The next 12 months:
• In the year ahead financial services firms expect to ramp up spending on marketing (+58%) – the highest balance since March 2011 (+67%)
• Investment in IT is expected to increase (+38%), but at the slowest pace since December 2013 (also +38%)
• Meanwhile, investment in land and buildings and in vehicles, plant & machinery are both expected to decrease (-42% and -3%, respectively)
• Increasing competition, and statutory legislation and regulation, were the factors cited as most likely to limit business expansion over the next twelve months (75% and 67%)
• Firms reported various drivers of capital expenditure over the next 12 months, but the share of firms citing the desire to reach new customers (68%) was particularly high compared with its long-run average.
Productivity:
• The majority of banks (97%), securities traders (93%) and life insurers (89%), building societies (55%), insurance brokers (54%) believe that output per employee has fallen or grown more slowly since the financial crisis.
• This was not the perception in other sectors, including finance houses (33%) general insurers (31%) and investment management (14%), where instead the majority of respondents believed productivity had not suffered.
• Asked which factors were most important in explaining weaker productivity, financial services said:
1. Increased resources devoted to non-productive activities (such as regulatory compliance).
2. A shift in activity to less profitable products/services
3. Lower capital investment
