British financial services sector feels the pinch

British banks have suffered their first drop in demand for financial services in five years, according to a survey by the Confederation of British Industry, known as the CBI.

Doubts over Brexit and the ups and downs of the financial market have taken their toll as banks recorded a 7 percent reduction in demand for services in the final quarter of the year, after experiencing a 12 percent rise in the previous quarter.

The report, carried out in conjunction with PwC Financial Services, revealed that 24 percent of companies questioned had reported an increase in business in the three months to December, while 32 percent said they had experienced a decline.

This marks the industry's first contraction in demand since September 2013.

"Financial services are a bellwether for the wider economy," said the CBI's chief economist, Rain Newton-Smith.

"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."

Andrew Kail, Head of Financial Services at PwC, said a number of on-going factors contributed to what he called a "more pessimistic note" and the key thing for companies to do was focus on what they could control, rather than worrying about bigger picture issues.

"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 said.

"UK financial services firms looking to prosper in 2019 should concentrate on issues they can control.

"Most importantly, by focusing on clear strategies for delivering value through products and services which meet their customers' needs, maximizing the efficiency of delivering these services - keeping operating costs under control - and using technology to augment the quality and efficiency of activities across their business."

The survey also suggested that in the short term at least, the outlook is unlikely to improve. Of those questioned, 12 percent of companies expect volumes to rise in the next quarter to March, with 20 percent anticipating a further fall.

Perhaps surprisingly, however, employment in the financial services sector continues to remain healthy. The survey revealed 14 percent of respondents had increased headcount, with 9 percent reducing, and employment is expected to rise rapidly in the next quarter.