Brexit and looming economic crisis hit financial services optimism

21 January 2019 6 min. read

The levels of optimism among the UK’s financial services sector remains at a worrying low, according to a new report co-authored by the country’s representative body for business interests. The document blames the slump on regulatory demands and uncertainty surrounding the UK's impending exit from the EU, as well as concerns that the global economy may be heading for a period of crisis.

The effect of Brexit negotiations – which continue under a cloud of uncertainty in the face of cabinet and parliamentary negotiations – have more than made their mark on the collective psyche of the business community. Most recently, this was illustrated by Chief Financial Officers at UK companies remain wary ahead of the finalisation of Brexit in 2019. With the end of Brexit negotiations nigh, a survey of British CFOs revealed that their confidence in business outcomes had collapsed to a net of -30, the lowest level since the aftermath of the initial referendum result.

Now, another study has found that the financial services industry is similarly cowering from the potential aftermath of Brexit, along with a myriad of other pressures impacting the UK market. Optimism in the financial services industry now rests at an even lower level than at the end of 2017, according to the latest research from PwC and the Confederation for British Industry (CBI). According to the industrial barometer, December 2018 saw a minor bounce on the ultimate low seen in September, but net confidence among financial services executives is still languishing at -24.

Q1 Optimism vs three months earlier

Over the duration of the two years following Brexit, the confidence of financial services players has struggled to pick up, as negotiations between Brussels and the UK Government have floundered repeatedly. In the period following the infamous Brexit referendum, the self-assurance of the sector has ventured into positive territory just once, before the triggering of Article 50 at the end of March 2017. Meanwhile, the confidence of the sector plunged to lower levels than seen during Britain’s last recession, in 2012. That saw net levels of corporate buoyancy sink to -30.

This plummet in confidence came in spite of the fact that most sub-sectors saw profits rise or remain unchanged in 2018. However, analysts suggested this is partially as weaker profitability was widely reported among investment managers and general insurers. Overall profitability is also expected to fall in the lead up to March, for the first time in over three years, reflecting a widespread deterioration in expectations.

The PwC/CBI joint study suggested that when taking an individual industry perspective, optimism appears split, with insurers being more upbeat than bankers and investment managers who expressed a steep drop in optimism. Investment managers in particular are painting a gloomy picture this quarter, fuelled by more immediate market changes, such as a falling stock markets, political uncertainty and regulators’ pressures. However, when it came to what issues were the most important moving forward, respondents were broadly united behind a few key themes.

Ranked as the number one concern by banks, building societies, general insurers and insurance brokers, and the number two concern for investment managers, by far the most important challenge facing financial services firms over the year ahead is macroeconomic uncertainty. This is to say, how the aggregate economy is behaving is a major cause of concern for financial services institutions at present.

A potent blend of Brexit pressures, the threat of trade wars between the world’s largest economies, and shrinking wages hampering consumption, led stock markets their highest volatility since the global financial crisis ten years before. This has led some leading economists to warn of an ominous ‘correction’, and with leading economies like Germany reportedly teetering on the brink of recession, this is far from unthinkable.

Top challenges for the year ahead

For UK financial services firms, local issues were also top of the list though. More than 20% cited regulatory compliance as an important challenge, with landmark changes in data governance likely to continue taking the harsh lead of the GDPR in future, and UK-EU laws governing financial services likely to see a rapid overhaul in the event of whatever outcome for Brexit emerges. Brexit itself was also cited as an important challenge by many firms, with preparing for the impact of the lengthy divorce also registering anxiety from more than 20% of respondents.

Commenting on the findings, Andrew Kail, Head of Financial Services at PwC, said, “Continued economic and political uncertainty means last year ended on a more pessimistic note than previous quarters for many working in UK financial services. 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 in to 2019.”

When asked where the greatest levels of competition come from for financial services firms in the coming year, the majority of respondents named new entrants as the key threat. According to researchers, more than half of firms in general insurance and investment management agreed with this, making it the most anxious subsector regarding this matter. This is partially because building societies and life insurers were also the most concerned about rivals entering the market from other sectors, while the vast majority of firms saw competition arriving from their own market segment.

Rain Newton-Smith, CBI Chief Economist, explained, “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.”

Related: Confidence of executives in crisis management vastly exceeds actual readiness.