UK financial services can still drive growth in a volatile world
Geopolitical turmoil is threatening the resilience of UK financial services, but we don’t need to sacrifice growth to protect them, writes KPMG’s Karim Haji
As the world tries to make sense of the new order, the last couple of months have been awash with economic and financial forecasts, with many sounding the alarm on financial stability. The Bank of England recently warned of rising risks to the stability of the UK’s financial system from exposure to global market turmoil and the International Monetary Fund echoed the same for global financial stability.
As an open economy with a large financial sector, the UK is at risk. We are now in the most volatile economic and geopolitical environment since 2008 and are seeing the impact this is having on financial services. More than six in 10 financial services leaders are investing more of total revenues this financial year in risk-proofing their businesses against geopolitical events.
We must remember that this isn’t just about safeguarding financial services, it’s about protecting the whole country, which depends on a healthy and secure financial services sector. It’s the backbone of the UK economy – creating almost 2.5m jobs and contributing over £100bn in taxes annually – so protecting it is vital. But so is building ambitious plans for it to thrive, so it can support our whole country and its future growth in times of turmoil and beyond.
What financial services need to drive UK growth
With the current state of geopolitics challenging economic and financial stability, the sector needs clarity and confidence that the government has realistic and achievable plans for growth. While we wait for its Financial Services Growth and Competitiveness strategy to be published, there are several areas that policymakers can prioritise to not only safeguard the sector but deliver growth.
First, the government has been clear that it plans to cut red tape and regulate for growth. But a balance needs to be struck, particularly when risks to financial stability are rising. Streamlining regulation may increase risk and must be proportionate to not only preserve a safe and stable financial system but protect the UK’s robust regulatory regime as a competitive asset.
Second, helping UK fintechs to flourish will be vital to create more jobs, growth and investment. Again, regulation must be proportionate to encourage the growth of fintechs and create an equal playing field for all to compete. Building a strong pipeline of SMEs and increasing the availability of scale-up capital will help keep innovative and valuable companies in the UK.
Then there is the opportunity to position the UK as a leader in sustainable finance if the government can clearly demonstrate how it will support businesses looking to manage and finance the net zero transition.
Next is seizing opportunities from trade corridors, as new and dynamic markets open up in Asia, the Middle East and Africa. It will also be important to reinforce existing alliances with other jurisdictions, such as the UK and Swiss Mutual Recognition Agreement, and explore alliance opportunities with other markets.
Finally, we need to talk about tax. Economic turmoil is leading to short-term changes to tax policies, which signal instability and unpredictability to investors, and ultimately undermine growth. The government will need to demonstrate how it will stabilise the UK’s tax regime for financial services and make it attractive to retain talent, attract investment and deliver long-term economic growth.
Risk-proofing for opportunity
Policymakers have a lot on their plate, but financial services firms must play their part too. The growing investment in risk-proofing highlights how the fragility of geopolitics is the most significant threat to future growth for the sector, diverting investment towards resilience. This is set to be a long-term trend.
So, the sector needs to change its mindset from risk-proofing not only for resilience, but for opportunity too. For example, geopolitical intelligence will not only help firms proactively respond to geopolitical developments with greater agility, but the real-time insights will also improve decision making, bring new efficiencies and help inform customer service in a world where support during times of crisis is vital.
While talks about a UK-US trade deal take centre stage, we can’t ignore the fact that the risks are greater than the potential hit to international trade. UK financial stability risks are rising and the financial services sector, which our entire country depends upon, is feeling the impact. Policymakers, regulators and the sector itself must work together to not only protect it but build ambitious plans that support the whole country and its future growth in this volatile world.
Karim Haji is KPMG’s global and UK head of financial services