Financial services take bull by horns

SCOTLAND's financial services industry is in bullish mood, with four out of five companies reporting an improvement in business levels in the second quarter of this year, compared with the same period a year ago. The majority of firms within the country's financial services sector have seen increased levels of business for the fifth quarter in a row.

As a result, funds under management in Scotland have soared by one-third this year to £533 million, up from £357m last year. The knock-on effect on employment was positive, with nearly half of businesses reporting an increase in employee numbers during the three-month period, with only 3 per cent having made staff cuts.

Encouragingly, most firms believe their prospects will continue to improve over the next year. Financial services bosses say the buoyant figures underline the high levels of confidence currently underpinning the industry.

The latest quarterly study was undertaken by independent trade body Scottish Financial Enterprise (SFE) in association with Capgemini.

SFE's members encompass all sectors of the industry including the major banks and building societies; general insurance, life assurance and pensions; investment management; asset servicing; corporate finance and broking services; professional advisers and support services. In total, SFE members account for more than 70 per cent of the 113,000 people directly employed within Scotland's financial services industry.

The quarterly survey polls SFE member companies on issues such as general business confidence, business volumes and profitability.

The survey also looks at changes in the geographical source of business, business investment, employee levels and other factors affecting business to complete the snapshot of how the different sectors that make up Scotland's financial services industry see their performance over the last quarter and how it may change in the next.

The findings for the second quarter of 2006 survey reveal that general business confidence for the current quarter remains high with 53 per cent of respondents expecting improved prospects in the current quarter. Half of the respondents believe their business prospects will continue to improve over the next 12 months.

The study showed that during the second quarter of 2006, 61 per cent of firms saw a rise in business volumes compared with the same period last year. Some 97 per cent expect volumes to rise or be maintained this quarter.

This is having a positive effect on profit margins. Most respondents saw profits increase or stay level during the quarter. However nearly one fifth (19 per cent) reported a fall in margins.

The firms predicted that profit margins are likely to remain largely constant during the present quarter.

Another positive finding was that a significantly higher percentage of respondents than anticipated in the previous survey reported increased turnover growth across all markets outside the UK during the period.

The main export market for financial services was the US, with twice as many companies than expected reporting turnover growth in the US for the last quarter. Significantly more companies than expected reported a rise in business investment compared to the first quarter 2006 prediction.

The majority of firms (78 per cent) are expecting to maintain their level of capital expenditure in the current quarter. Nine out of ten companies maintained their research and development in the last quarter, while the outlook for such spending remains broadly level.

The number of businesses reporting employment growth is in line with expectations from the last survey, with almost half of respondents reporting increased staff levels. For the current quarter, 36 per cent of companies expect to increase their employment levels further while the majority expect to stay level.

On the downside, level of demand has overtaken competition as the factor that is causing the most concern amongst member companies.

And statutory legislation and regulation has become a much greater concern for businesses during the last quarter, which SFE says highlights the need for the government to reduce red tape.

The research by SFE shows investment management is the biggest sector within Scottish financial services, accounting for £429bn of funds under management. The general insurance, life assurance and pensions sector has £74bn of funds under management.

Banks and building societies accounted for a further £25bn of funds under management, with corporate finance and brokering adding in £5bn to give a total of £533bn.

Amanda Harvie, chief executive of SFE, said: "Scotland's financial services industry continues to be very positive, with the majority of firms expecting business to improve in the year ahead.

"However, there is an increased concern across the industry about the potential impact of legislation and regulation on business growth, highlighting the need for government and regulators to reduce unnecessary red tape.

"The investment management and asset servicing sectors are again the most confident about their prospects. There is good reason for this as SFE research shows funds under management in Scotland by our member companies have risen this year to more than £533bn, compared with £357bn a year ago."

Rosemary Stark, vice president of financial services at Capgemini added: "With the survey showing levels of demand, competition and customer confidence to be the three areas causing most concern at present, it will be important for financial services firms in Scotland to continue to focus on innovative approaches to customer service - particularly in the retail banking space - to ensure competitive advantage."