Brexit anxiety taking its toll on financial services sector

Britain’s financial services are becoming increasingly anxious about life after the Brexit vote, according to the latest detailed survey of confidence in the sector, reports The Guardian.

Optimism dropped for the third consecutive quarter in the three months to September, according to the research jointly produced by the CBI business lobby group and the accountancy firm PwC.

It marked the longest run of deteriorating sentiment since the first quarter of 2009, when the global financial system was in the midst of a deep and prolonged crisis.

The biggest drop in confidence was among finance houses, building societies and investment managers, and less so among banks. Optimism was broadly stable among life and general insurance providers.

When asked to list their main concerns over Brexit, financial firms cited the top three risks as a negative impact on the economy, changes in access to EU markets and the prospect of lower yields.

Andrew Kail, the head of UK financial services at PwC, said the continuing fall in confidence was a cause for concern, adding that businesses were considering moving their operations out of Britain because of the vote and uncertainty over future trading agreements.

“It’s still early days and there is no real clarity on what future agreements will be reached. Consequently, many of our clients are considering their options, including potential restructuring and relocation of their businesses.”

Kail said there was a danger Britain’s standing as a major financial hub might be damaged. “Two million people across the UK are directly or indirectly employed by the financial services sector.”

He said prolonged low interest rates, as well as complexities caused by changing regulations and technology, were all challenges facing the sector. “Brexit has added an additional ingredient to the mixture.”

Of the 115 firms surveyed, 15 per cent said they were more optimistic about overall business conditions, compared with three months ago, while 28 per cent were less optimistic. That gave a balance of -13 per cent, and comes just after a -16 per cent balance for the previous quarter.

Despite the drop in confidence, business and profits actually picked up in the sector over the three months. Business volumes were higher for 48 per cent of firms, and lower for 13 per cent, giving a rounded-up balance of +35 per cent, compared with +22 per cent in June.

“As firms get back into the swing of things after the summer and continue to digest the implications of the EU Referendum, it’s good to see that demand in the financial services sector has held up,” said Rain Newton-Smith, the CBI’s chief economist.

“But the challenges facing the sector have not gone away – they’ve actually grown. Add the uncertainty caused by Brexit to low interest rates, technological change and strong competition, and it’s plain to see why optimism is falling and pressure on margins remains intense.”

Newton-Smith said central to concerns about Brexit was the risk it posed to the wider economy in the years ahead. More than half of companies in the financial services sector felt the general impact of the vote was negative. About one in 10 said the impact was positive.

She urged the government to calm fears within the financial community by communicating clear plans for negotiations to leave the EU and by producing an “ambitious” autumn statement on 23 November that sets out a clear direction for growth.

The Bank of England responded in August to the uncertainty caused by the Brexit vote by announcing a package of measures that include a reduction in interest rates to an all-time low of 0.25 per cent.

Earlier this month, the Bank’s monetary policy committee left the door open to another interest rate cut this year.

Employment was stable in the financial services sector in the third quarter, the CBI/PwC survey found. It was expected to pick up over the next quarter, with job creation planned in most areas, though not in life insurance.

In the year ahead, financial services firms expect to increase IT and marketing capital spending at a faster pace, but scale back other investments, albeit to a lesser degree than in the previous quarter.