Outlook for financial services, Summer 2015
EY ITEM Club
Our latest forecast sees the UK recovery looking encouraging, with GDP expected to grow by 2.7% in 2015. Consumer spending is on the rise and growth in business lending is predicted to move back into positive territory for the first time since 2008. However, changes announced in the Summer Budget will present both challenges and opportunities to the banking, insurance and asset management sectors.
“With the UK set to be G7’s fastest-growing economy in 2015 for the second consecutive year, one might think that the UK financial services sector can look forward to positive conditions. While that should be the case, there are a number of pitfalls that need to be successfully navigated.”
Managing Partner, UK Financial Services
Read Chris’s forecast overview
With the UK set to be the G7’s fastest-growing economy in 2015 for the second consecutive year, one might think that the financial services sector can look forward to positive conditions. While that should be the case, there a number of pitfalls that need to be successfully navigated.
Possibility of early increase in UK interest rates
One worry is that the UK will talk itself into following US interest rate policy and raise them from their current “emergency” level. While the US’s economic recovery is relatively robust and broad-based, the UK’s upturn — albeit slightly faster at present — continues to be driven by the “usual suspects” of consumer spending and services. The UK recovery is also largely domestic in nature, with exports suffering from the slowdown in China and sterling’s strength against the euro.
That said, an early rise in rates would be welcome to the UK financial services sector. For banks, it would widen the currently narrow delta between saving and lending rates, while for insurers and asset managers, it should boost investment returns. However, the impact on the “real” economy is a hard one to call. If the rate rises were sharp enough to be meaningful, they could make loans less affordable to businesses, while simultaneously pushing sterling even higher against the euro. The “wider margins v higher growth” equation is actually one where the industry needs to succeed on both sides.
UK’s global attractiveness to financial services
A further worry is the escalating concern over the UK’s relative attractiveness as a location for financial services. With the Financial Conduct Authority implementing some of the world’s most stringent regulatory requirements and the UK Government having only slightly softened its hawkish rhetoric since the election, it is feared that the UK may start to lose out on financial services investments and head offices, at least while the subject of possible Brexit remains open. The question is, what effect will this have on London’s position as a global financial services hub?
As banks consider relocating, the growth focus shifts to FinTech
Regulatory policy and governmental time have arguably made the UK less attractive as a global or European corporate headquarters venue, but more attractive for the less regulated and currently less high-profile areas of financial services. Despite corporate tax rates falling more quickly than personal ones, it is the attractiveness of London and the UK to individuals rather than companies that will maintain London’s high international ranking.
Amid widespread confusion over the Government’s attitude to these shifts, one of the most interesting areas of growth in the UK and European financial services industry is the FinTech sector, where companies are using Europe’s highly developed infrastructure to disrupt and disintermediate existing players. This poses not just a competitive challenge to the existing market players, but a real challenge and dilemma to regulators and governments. Recent events in Greece have shown how a government can currently control capital flows through the financial system in a relatively straightforward (albeit painful) fashion. Would that task be as straightforward in 10 years’ time, when consumers and businesses will have many more channels and mechanisms for moving their assets around? How will the Government regulate the tools that will effectively reduce their control? It could be the equivalent of trying to stop the flow of news by shutting high-street newsagents.
Now there’s a thought for central bankers.
Read the full Summer 2015 forecast 1.1Mb, August 2015