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UK financial services clock rapid growth but Omicron dents optimism

·4-min read
London city
London: Financial services profitability grew at the fastest rate since December 2015. Photo: Getty

Business volumes for UK financial services firms grew at the quickest pace since June 2017 in the three months to December 2021, according to the latest Confederation of British Industry (CBI)/PwC Financial Services Survey.

Volumes grew at a rate of 42% from 33% in September.

This rate of growth is expected to continue in the first quarter of 2022, according to the survey of 105 financial services firms, conducted between 22 November and 10 December.

Profitability grew at the fastest rate since December 2015 — the third consecutive quarter to see strong growth. However, profitability growth is forecast to soften in the next quarter.

Despite the growth in volumes and profitability, growth in optimism cooled compared with the previous quarter. Optimism grew at a rate of 15% compared with 35% in September. However, optimism still remained above the long-run average.

Rain Newton-Smith, CBI chief economist, said: "The softening in optimism is something to watch closely, due to increased COVID-19 uncertainty clouding the near-term economic outlook.

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“This uncertainty may be weighing on investment intentions in physical assets, such as buildings, although IT spending — so crucial in allowing firms to innovate and operate remotely during the pandemic — continues to be a bright spot. Unleashing business investment is key to powering the UK’s economic recovery, and it will be a cause for concern if firms move back from a growth mindset to focusing on survival."

Isabelle Jenkins, head of financial services at PwC UK, said: "The softening in optimism likely reflects concerns about what could be a destablising cocktail of COVID-19 uncertainty, higher inflation, geopolitical tensions, and cyber security concerns. However, the financial services sector has proved its resilience in the face of increasing change, which will likely continue over the next quarter."

The outlook for investment in the financial services sector over 2022 continues to be mixed, with anticipated growth in IT capital expenditures being offset by a fall in investment intentions for land & buildings and vehicles, plant & machinery, the report found.

A third (33%) of firms put this down to uncertainty about demand, while 31% cited labour shortages. A quarter (26%) of firms said that inadequate net return was likely to limit future investment — a significant drop compared to the last quarter, when 51% of businesses said this was a factor.

Almost half (45%) of firms said they are in the transition stage of realising the benefits of upgrading IT and tech while 17% are at the implementation stage and 32% are at the benefits realisation stage.

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Some 43% said that understanding customer behaviours and preferences was the greatest value from advancements in AI and analytics.

Most companies' strategies for engaging with the tech sector are based around using emerging fintechs and big tech firms as active partners and established fintechs as vendors, the report found.

Nearly half (47%) of financial services firms see fintech as being absolutely critical in supporting their business functions — up from 35% in September. Four in five (81%) businesses expect fintech to make the biggest difference in their customer experience.

Over the next five years, 82% of firms forecast digitisation and new technologies to lead to the automation of standardised or repetitive tasks, 58% think there will be greater collaboration on tasks between humans and technology, and 45% see intelligence systems playing a greater role in decision-making.

The number of workers employed across the sector remained unchanged for the second successive quarter. However, headcount is expected to rise in the coming quarter.

Over half (56%) said the greatest workforce priority for 2022 is retaining talent, 44% are prioritising achieving high levels of employee engagement, and 36% are planning for future talent requirements.

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“Firms should, of course, keep an eye on the underlying trends coming their way, but also ensure that key priorities, such as upskilling staff, embracing tech and enhancing customer interaction, remain high on the to-do list,” said Jenkins.

Some 70% said supporting health and wellbeing would be a priority in the next six to 12 months. Over half (54%) also cited improving ethnic equality and 49% said improving gender equality was a priority.

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