The UK's financial services firms reported that profitability improved at an above average pace in the third quarter of the year, new data revealed.
This marks a second successive quarter of strong growth, with profitability expected to rise at a similar pace in Q4, according to a Confederation of British Industry (CBI)/PWC survey of 115 financial services conducted last month.
Profitability continued to grow but at a slower pace than the previous quarter — 29% compared to 39% in Q2 — with profits growth experienced across most sub-sectors.
Overall, profitability is set to grow at a similar pace next quarter — up 32%.
The report found that business volumes were up for a second consecutive quarter in the three months to September and are expected to rise at an even stronger pace in the final quarter of the year.
“It’s great to see that the recovery in the financial services sector has firmly taken root, with volumes and profitability growing strongly for a second successive quarter,” said Ben Jones, CBI's principal economist.
"Given the improvement in demand across the wider economy, financial services firms have every reason to be more optimistic and are ramping up their investment in new technologies.”
However, investment is an issue — the main constraint over the 12 months ahead being inadequate net returns.
This was cited by around half (51%) of financial services firms, similar to the previous quarter.
Around one fifth (22%) of financial services firms said labour shortages were the reason for constraint on investment, unchanged on the previous quarter and in line with the long-run average.
“The concern now is whether the pace of economic recovery in the UK can be sustained in the months ahead as energy costs spiral and labour shortages and supply chain constraints bite,” said Jones.
“It is imperative that government and business work together to address short-term challenges, unleash investment and set a sustainable course for the economy.”
Headcount across the sector as a whole was unchanged in Q3, suggesting numbers employed have broadly stabilised after the sharp declines seen throughout 2020 and the first three months of 2021.
Headcount is expected to grow in Q4.
Changes in regulation were the biggest drivers of disruption for 90% financial services firms. Some 68% cited changes in customer preferences and behaviours as the biggest drivers of disruption.
The majority (72%) are looking to respond by employing new technology or adapting existing capabilities.
The report also found these firms expect to invest more in cyber security over the next twelve months compared to the previous year (balance of +54%).
Over three quarters (78%) are actively engaged in upskilling existing staff, while 74% are recruiting new staff to equip their business for future skills needs.
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