Our 12th annual financial services survey suggests an air of positivity among the financial services businesses in the City of London.
In line with the overall improving economic outlook, our survey results show a feeling of optimism within the financial services industry, as 62% of respondents believe the UK economy to be either stable or improved on 12 months ago. However, this is tinged with caution as there is no anticipation of a return to the booming times of pre-2008.
Business Confidence
The underlying caution embedded within the financial services industry is clearly illustrated by nearly two-thirds of our respondents continuing to believe that London's reputation as a major financial centre has been damaged by the financial crisis of the last two years. This sentiment is consistent with last year's findings, where 62% held the same view.
As with last year, New York is viewed as the biggest threat to London in terms of being the mainstay for financial services. However, more revealing is Dubai's fall from grace, with only 2% of respondents regarding Dubai as a threat to London compared to 20% last year. This is no doubt a consequence of recent news impacting the Dubai economy and its underlying confidence.
On a positive note, 39% of respondents are optimistic about their business's future prospects, which is a notable shift on the prior year where 44% of respondents were feeling pessimistic. This upbeat outlook is reinforced by 94% of respondents reporting either stable or increased turnover expectations for the next 12 months, which compares favourably to last year's survey result of 65%.
Despite a general optimistic outlook, the financial services industry has experienced some difficult challenges in the last two years and this is expected to continue, at least for the immediate future. This is revealed through respondents experiencing difficult trading conditions, which has ultimately hindered growth and profitability in the last 12 months. For example, 37% of respondents have experienced a fall in business volume, which is consistent with 39% reported last year. In addition, 44% and 37% of respondents have experienced declines in profit margins and turnover respectively, which compares with 56% and 38% respectively in last year's survey.
In 2008, businesses generally reported stable headcounts, as firms looked to make savings elsewhere. However, 2009 proved to be a year of redundancies, with 39% of respondents revealing a decline in headcount. Returning to the theme of optimism, 88% of respondents are hopeful of either maintaining or increasing headcount in the next 12 months. On a consistent note, 75% of respondents are also expecting discretionary expenditure to either remain stable or increase, which compares favourably to last year when 43% of respondents were expecting a decline.
Expenditure on regulatory compliance is immune to economic conditions, with 96% of respondents expecting it to be stable or increase in the next 12 months, which is consistent with the 95% reported last year.
Tax
Historically, changes in tax legislation have resulted in a fairly neutral response. However, in light of some noticeable changes to income tax legislation, 36% of respondents are expecting this to have a negative impact on their business. Consequently, 35% of respondents are considering plans in response to these tax changes, while 34% are looking to change the way they incentivise employees. Overall, this is consistent with 42% of respondents believing changes in UK tax legislation will be one of the key factors impeding business growth.
Changes to VAT legislation have also fallen below people's radar, with 33% of respondents expecting an increase in irrecoverable VAT due to the new VAT place of supply rules. However, not unexpectedly, 86% of respondents believe that the temporary reduced rate of VAT had no beneficial impact for their business. The survey asked respondents to select factors they believe will most affect business growth over the next 12 months. Of the ten responses available, all bar two received 22% or more of the vote, reflecting diverse views among respondents, which is in stark contrast to last year, where the top three responses of further economic factors, consumer confidence and ability to raise funds dominated the voting.
The top three factors of this year's survey were: regulation requirements, changes in UK tax legislation and consumer confidence. These findings are consistent with industry optimism as firms become more confident of economic recovery but more concerned with regulation and legislation restricting the speed and extent to which this can be achieved. 2010 is expected to be another challenging year.
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