Demand for financial services drops for first time in five years and could fall further this quarter

Demand for financial services has fallen for the first time in five years and business volumes could drop even further in the first quarter of 2019, firms have warned.

A survey of 84 companies, carried out by the Confederation of British Industry and PwC, showed that business volumes and sentiment fell in the three months to December last year.

Global market volatility, Brexit uncertainty, macroeconomic factors and regulatory compliance led to the first contraction in demand since September 2013, the survey showed.

It also revealed that businesses feared demand would continue to fall in the three months to March, the first negative outlook by the sector since December 2009.

“A combination of macroeconomic and Brexit uncertainty, regulatory compliance and global market volatility is taking a toll on the UK’s financial services sector,” CBI chief economist Rain Newton-Smith said.

“Financial services are a bellwether for the wider – the persistent weakness in optimism and the deterioration in expectations sound a warning for the outlook,” she added.

The picture changed markedly between sub-sectors, with insurers expanding volumes and bank and building societies remaining flat or falling, while investment managers reported the sharpest fall in demand since the financial crisis.

“It’s a broad industry, meaning optimism varies between sub-sectors and companies, but this survey shows that investment managers, who have been more immediately impacted by volatile stock markets, are gloomiest heading into 2019,” PwC head of financial services Andrew Kail said.

“The underlying reasons for this dip in optimism have been around for some time – political and Brexit-related uncertainty, regulatory pressures and a sustained low interest rate environment impacting margins,” he added.

Profitability remained flat in the final quarter of the year, with 24 per cent of firms reporting increased profits and 20 per cent saying they fell.

When it came to expected business volumes in the first quarter of 2019, 12 per cent expected a rise while 20 per cent expected them to fall – the lowest balance since December 2009.

Financial services firms said the biggest challenge facing the sector over the year ahead was macroeconomic uncertainty, followed by regulatory compliance and then preparing for the impact of Brexit.