By Jonathan Davies

Reducing the cost of regulatory compliance should be the new Conservative government’s priority for financial services, according to firms in most sub-sectors (including banking, building societies and life insurance).

Tax stability was also ranked highly and was the number one concern for general insurers and investment managers, according to the latest CBI/PwC Financial Services Survey for the three months to June.

Business volumes and optimism in the sector continued to grow at an above average pace but more slowly than in the previous quarter. Weaker overall growth mainly reflected a fall in volumes among building societies and stable volumes in the banking sector.

Trends in financial services incomes varied, with the value of fees, commissions and premiums falling from the previous quarter, weighed down by poor results among banks and building societies. However, net interest, investment and trading income continued to grow at a healthy pace.

Meanwhile there was a sharp increase in total costs, but non-performing loans continued to fall and firms managed to keep average costs under control. These factors, combined with decent growth in business volumes, meant that profits increased at their fastest pace since March 2011, and rose across all sectors.

Overall business volumes are expected to grow at a slightly faster pace next quarter and profits are predicted to increase in most sectors, with the exceptions of banking and building societies.

Rain Newton-Smith, CBI Director of Economics, said: “Demand for financial services continues to strengthen, with profits holding up and employment showing signs of an improving trend.

“But the cost of regulation and tax uncertainty are a top concern for firms across the sector. They want to see the Government focus on keeping the UK a competitive financial centre by not putting UK firms at a disadvantage.

“Meanwhile, in the Eurozone, negotiators need to move quickly towards a new bailout programme that secures Greece’s finances for the long term, but is also realistic in terms of Greece’s ability to pay and carry out meaningful structural reforms.

“Looking ahead financial services businesses are planning to ramp up their marketing spend to try to reach new customers, as competition from new entrants and from other sectors intensifies.”

Kevin Burrowes, UK financial services leader at PwC, said: “Levels of optimism amongst banks remains broadly unchanged this quarter which is a little surprising as we had expected to see a bounce from the election result and the greater encouragement for financial services from the new government. However, ongoing regulatory uncertainty, the EU referendum and other macro-economic factors have dampened the outlook at least in the short term.

“In recent years, banks have enhanced many of their customer-facing operations with digital solutions, most notably through the introduction of mobile apps. The next wave of innovation lies in the digitalisation of the back-end processes, many of which still rely on a high degree of manual processing. Ensuring a continued spend on core IT is critical to the success of banks.”