Financial services firms haven't felt this gloomy since 2008 - and preparing for Brexit is the number one challenge
- Around 45% of firms less optimistic
- Nine out of ten bank are uncertain about preparing for Brexit
- 18% of financial services firms said they had increased employment
Confidence among Britain's financial services firms dropped again in the last three months of 2016, making it the 'gloomiest' year for the sector since the 2008 financial crisis.
Preparing for Brexit and fears over global uncertainty were the most common concerns.
Banks, general insurers and finance houses were the most unenthusiastic, as sector profit growth ground to a halt and business volumes fell flat in the three months to December, according to today's financial services survey by the Confederation of British Industry (CBI) and PWC.
Around 45 per cent of firms were less confident about the overall business situation compared to the previous three months, while only 10 per cent were more optimistic, giving a balance of minus 35 per cent.
Sentiment among financial services firms deteriorated further in the three months to December
It marks the fourth consecutive quarter of deterioration and the longest period of declining confidence since the global market crash of 2008/09.
This comes at the same time as top forecasters warned today that Britain should beware of being overconfident as the economy is heading for a slump.
The influential EY Item Club predicted recently that growth will slow to just 1.3 per cent this year and will remain below 2 per cent until 2020.
Mark Gregory, EY's chief economist, said: 'Businesses and consumers need to avoid being lulled into a false sense of security.'
Many economists had been predicting a huge slump in the economy and households' finances in the wake of the vote to leave the EU. However, the recession that many had predicted has so far failed to materialise, while the Bank of England last week said that Brexit is no longer the greatest threat to the UK's financial stability.
CBI chief economist Rain Newton-Smith said: 'Ruling out membership of the single market has reduced options for maintaining a barrier-free trading relationship between the UK and the EU.
'Businesses will welcome the greater clarity and the ambition to create a more prosperous, open and global Britain, with the freest possible trade between the UK and the EU.'
A number of banks, including JP Morgan and HSBC, confirmed that parts of their businesses would be moved from the City in response to Brexit and Prime Minister Theresa May's decision to rule out single market membership.
Despite uncertainty ahead, Business secretary, Greg Clark said this morning that the City of London will be an important part of the UK economy post-Brexit.
He said financial services are a 'huge national asset'. They are 'good for the whole of Europe'.
Andrew Kail, Head of Financial Services at PwC welcomed May's comments. 'Uncertainty has contributed to the low levels of optimism reported by many financial services companies, particularly by the banks,' he said.
'Financial services companies face many challenges to their business models from competition, regulation, technology and Brexit and, as a consequence, are having to take some big decisions about their future strategy.
Prime Minister Theresa May's has decided to rule out single market membership
'However, the clarity on the UK position from the Prime Minister's speech is welcome, not least the commitment to a period of phased implementation.
'While companies are relatively positive about short term business volumes and profitability, they continue to need to make significant investments to protect their future.'
The City of London believes that post Brexit, the UK would be labelled as a 'third country' in the eyes of EU regulators.
Business Secretary Greg Clarke says the City of London will be an important part of the UK economy post-Brexit
The report warned that existing arrangements with third countries that reach 'equivalency' standards lack key safeguards and are not a long-term solution for the industry.
It found that the 'cooperative relationship' between the EU and UK needs to be maintained, which means 'avoiding the imposition of new barriers between the two markets when Brexit occurs.'
Mark Hoban, former Treasury minister and chairman of the IRSG - which is co-sponsored by TheCityUK and the City of London Corporation - said: 'The analysis is clear: a new UK-EU relationship based on existing third country regimes (TCRs) and equivalence is not a viable option for the whole industry.
'The TCRs are limited in coverage and uncertain in their availability, and too unpredictable. A bespoke solution with reasonable safeguards is the only way to prevent the fragmentation of financial markets and ensure continuity of service for firms and customers in the UK and across the EU.'
A Treasury spokeswoman reiterated confidence for the UK's economic future: 'As the UK exits the EU, the Government is determined that our country remains a great place to invest and do business.
'Our financial service sector makes a crucial contribution to our economy and we are determined that it continues as the hub for both Europe and the rest of the world.'
Depsite the gloomy outlook, there are signs of an improvement in business conditions over the next quarter for some sectors.
Future opportunities: Firms spending on IT and cyber security will increase this year
The report found that firms are also looking to future opportunities, with the promise of FinTech offering an exciting chance for the sector to lead the way in adopting new technology and boosting productivity.
Asked about the potential of technology investments over the next three years, firms see the biggest potential as being for cyber security and digital transformation.
Following recent ONS data showing a slight rise in employment in financial services in the third quarter of 2016, the survey showed a further sign of an improving picture, with numbers employed edging up in the last three months of 2016 and a more solid increase predicted for the next three months.
The survey showed that 18 per cent of financial services firms said they had increased employment, while 10 per cent said that it had decreased.
Spending on IT is expected to continue to rise at a healthy pace, and increasing efficiency and ensuring regulatory compliance remain the most important motivations for investment.
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