BUSINESS volumes were flat for specialist lenders in the last quarter of 2018, according to the latest CBI/PwC financial services survey, as demand for financial services fell.
The quarterly survey of 84 firms revealed flat or falling business volumes for banks, building societies and specialist lenders, although sentiment held up for insurers which managed to grow their volumes. Demand for the financial services sector as a whole dropped for the first time in five years, with investment managers reporting the steepest fall in activity since the financial crisis.
Profits in the financial services sector as a whole remained flat for a third successive quarter, with investment managers and general insurers reporting declining profitability.
Looking to this year, declines are expected to continue at a similar pace over the quarter to March, which is the first time that growth expectations have turned negative since 2009. Overall profitability is also expected to fall for the first time in over three years, as a result of a more widespread deterioration in expectations across the industry.
The year will bring a number of challenges for firms. The top three issues concerning them are macroeconomic uncertainty, regulatory compliance, and preparing for the impact of Brexit.
Meanwhile, new entrants also pose a competitive threat to firms in many sectors. For example, over half of firms in general insurance and investment management see new challengers as a source of competition over the year ahead. In all sectors, the vast majority of firms see competition coming from their own sector. In the banking sector, where collaboration with challenger firms is more established, firms said they see the least potential for competition from either new entrants or from firms outside their sector.
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“A combination of macroeconomic and Brexit uncertainty, regulatory compliance and global market volatility are taking a toll on the UK’s financial services sector,” said Rain Newton-Smith, CBI chief economist.
“Financial services are a bellwether for the wider economy. The persistent weakness in optimism and the deterioration in expectations sound a warning for the outlook.
“It’s clear the sector is grappling with a number of other challenges too, from using data to improve customer experiences, to new entrants to the sector. However, with new risks and demands come opportunities. Insurers in particular are pulling ahead, many of whom are moving into areas such as asset management outside of their traditional markets.”