UK: The 2008 Financial Services Survey - A Dark Economic Cloud Has Descended Over The City Of London

Last Updated: 19 February 2009
Article by Natasha Lee

Natasha Lee explains the results of our latest survey of the financial services sector, which indicate a bleak outlook for businesses.

For the second year in a row, the Smith & Williamson annual survey of FSA-regulated businesses shows a decrease in business confidence. However, this decline has accelerated substantially, with 56% of respondents reporting a drop in profit margins. Even more unsettling is the news that 62% of participants believe that London's reputation as a financial centre has fallen since last year.

Business Confidence

Now in its 11th year, the survey collects the opinions and expectations of financial services businesses in the City of London. This year, 44% of respondents expressed that confidence in their business prospects had decreased or strongly decreased over the last year, which is in contrast to 2007, when 49% were reasonably confident and only 18% were not. Last year's survey showed the first decrease in business confidence in 5 years. While the latest survey does not compare like-for-like questions with the 2007 survey, it does illustrate that the confidence of the sector has plummeted over the past year.

Fig 1: Business Confidence

According to 62% of respondents, London's reputation as a major financial centre has decreased over the past 12 months. This shows a significant shift from 2007, when 88% of respondents agreed that London had strengthened its position as a key financial centre over the last five years. It is expected that New York or Dubai is more likely to take over the mantle as the world's financial centre.

While the results are more negative than in previous years, the respondents appear to believe that they can weather the current storm. When questioned more closely about their experiences in 2008 and what their expectations were for 2009, they revealed what appears to be a varied outlook. For example, 38% of respondents have seen the volume of their business decrease in the past year, while 56% of respondents report a stable or increased volume of business in the past 12 months.

Fig 2: Change In Business Volume Over The Past 12 Months

While 56% reported decreased profit margins and 38% a decrease in turnover, 39% of respondents are expecting stable turnover and 26% are expecting an increase in turnover in 2009. This shows a dramatic contrast to the 2007 survey results, where 54% expected turnover to increase and only 4% expected a decrease.

Fig 3: Turnover Expectations: Comparison Of 2007 And 2008 Results

Considering the results above, it is unsurprising that, generally, respondents are not expecting an increase in their headcount, with nearly a quarter forecasting redundancies. For some firms this will be a new experience that will give rise to tax and legal issues that will need to be addressed. The overall message from respondents in respect of headcount is consistent with a low level of anticipated growth.

In respect of capital expenditure, a decrease is expected by 43% of respondents, while 41% expect it to remain the same and 16% expect an increase over the next year. However, 95% of the respondents expect expenditure on regulatory compliance to remain the same or increase. This appears to reflect a lack of growth, making firms more conscious of their expenditure. As a result, only necessary expenditure will be made, rather than discretionary or investment expenditure.

With the expectations for financial services businesses appearing to remain on an even keel through 2009, it must be that businesses in the sector are planning on making cuts elsewhere. The survey shows that more than half of the respondents expect a cut in discretionary spending in 2009. Spending on 'optional' services is likely to be downsized over the next 12 months, and marketing budgets could well feel the pinch.

Tax Issues

The results from the survey in respect of tax are not very revealing, with a majority of responses suggesting that expected changes to UK tax laws will have little to no effect on businesses. For example, 63% of the respondents forecast that recent changes to the UK tax legislation will have a neutral impact on the growth of the financial services industry. 88% of respondents think that the changes to be made to the supply rules for VAT will have neither a positive nor negative financial impact on their firm's business. Furthermore, 82% of the respondents reported that the various changes to VAT have had a balanced effect on their business.

These responses indicate that tax legislation is the least of the industry's worries. Businesses are undoubtedly more concerned about getting through an increasingly challenging economic climate, both in terms of winning work and securing additional funding.

The survey asked the respondents to select the factors they believe will most affect business growth over the next 12 months and the top three responses were: further economic factors, consumer confidence and their ability to raise funds.

In short, the views expressed in our survey are consistent with those of economic analysts: 2009 will be a hard year across the economy, and the financial services industry will be no different.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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