The first quarterly survey in the United Kingdom of 115 firms in the financial services sector since the Brexit vote has found that optimism about the overall business situation fell for the third consecutive quarter - the longest period of declining sentiment since the depths of the financial crisis in early 2009. Sentiment has deteriorated most sharply among finance houses, building societies and investment managers.
It fell only slightly among banks, and optimism was "broadly stable" in the life and general insurance sectors, according to the latest CBI/PwC Financial Services Survey.
This comes at a time when London's average score in the rankings for the Global Financial Services Index has dropped 10% since the EU referendum result was declared. This ranking is based on an online questionnaire completed by financial services professionals worldwide and is part of a report published today by the Z/Yen Group in London and the China Development Institute (CDI), a think-tank based in Shenzen.
While London retains one of the five lead positions in the Global Financial Services Index ranking, along with New York, Singapore, Hong Kong and Tokyo, continuing uncertainty post Brexit is clearly fueling negative sentiment. Just over half of all financial services firms told the CBI/PwC survey that the general impact of the vote was negative, whereas only around one in ten firms pointed to a positive impact.
Britain has been consumed with angst since the EU referendum, with debate ranging from the wisdom of placing such an issue to a referendum vote in the first place, to how it was conducted, to whether the result should be considered binding. Having barely digested a shock result of seismic proportion, there is a sense now that summer is over and fear has returned over what exactly was being said when
A legal challenge - covered here on Forbes - to the Brexit process is now to be heard in the U.K.'s High Court next month. It asks for a mandatory vote in Parliament to trigger Article 50 - which could be critical as the majority of the Members of Parliament (MPs) want to remain in the European Union.
The CBI/PwC survey reveals that financial services firms saw healthy growth in overall business volumes in the three months to September, with only finance houses reporting a drop in activity.
“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. 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," said Rain Newton-Smith, CBI Chief Economist.
“With firms voicing strong concerns about the impact of Brexit, especially the risks to the wider economy in the years ahead, the Government must allay their unease with clear plans for negotiations to leave the EU," she added.
Andrew Kail, U.K. financial services leader at PwC said that as the "big picture agenda" of transforming business models to respond to customer, regulatory and technological changes continues apace, Brexit has added an additional ingredient.
"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. However it’s the domino effect on people, productivity and position as a financial hub that must be guarded against," said Mr. Kail.
Some two million people across the U.K. are "directly or indirectly employed by the financial services sector" he said. "Financial services firms all depend on the access to talent and market infrastructure, and the business environment. And by extension, so do the many firms using Europe as a springboard into the U.K.," he added.
The CBI/PwC survey reveals that in the year ahead, financial services firms in the U.K. expect to increase IT (up 50% from +46% in June) and marketing (+26% from +19% in June) capital spending at a faster pace, and to scale back other investments to a lesser degree than in the previous quarter. The main reasons for authorizing investment are cited as to increase efficiency/speed (68% of respondents), statutory legislation and regulation (66%) and to provide new services (58%).
As uncertainty abounds around Brexit there is a report just out by the think-tank New Financial on "What do EU capital markets look like post-Brexit?" It measures the size, depth and growth of capital markets in the EU excluding the UK (the EU27) across 24 different sectors of the capital markets over the past decade.
New Financial argues that Europe needs bigger and better capital markets to help drive its recovery and growth.
"This report puts some hard numbers for the first time on where EU capital markets stand without the U.K. – and shows that there is a huge opportunity for the economy and for the capital markets industry in developing deeper capital markets in the EU beyond Brexit" said William Wright, its founder and Managing Director.
As a taster - "In absolute terms, the value of capital markets activity in the EU excluding the U.K. (EU27) is around one quarter smaller than in the EU as a whole. This gap is most pronounced in equity markets (for example, the U.K. accounts for one third of all IPO activity in the EU) and pensions (where the U.K. accounts for 43% of all EU pensions assets)," says the report.
