Financial services gloom deepens as income and profit fall at record rate

INCOME and profits in the UK financial services sector has fallen at record rates as the recession deepens and the credit crunch continues to bite, according to figures released today.

Some 59 per cent of firms told the CBI's financial services survey that their business volumes had fallen in the three months to the start of December, while a quarter of those surveyed believe volumes will fall further.

Profitability in the sector declined at a record rate for the second survey running, with a balance of 55 per cent of firms reporting a fall.

In what the CBI called a "clear sign that tightened credit markets are hitting the wider economy", the amount of business conducted with manufacturers, retailers and other commercial firms also shrank at a record rate, while job losses mounted and investment plans were cut.

Sentiment fell further, as 45 per cent said they were less optimistic about the overall business situation in the financial services sector than they were in September.

Yet Scottish Financial Enterprise (SFE), the industry body north of the Border, sounded a note of optimism, with its head saying there was a diverse range of business in Scotland, with some such as insurance companies operating in sectors less affected than banking.

In the CBI survey – conducted with PricewaterhouseCoopers – firms said the number of staff employed in financial services continued to fall, but by less than feared. But 35 per cent of firms surveyed expected headcounts to fall in the coming months.

John Cridland, the CBI deputy director-general, said: "2008 was the year the financial services industry would rather forget, and it looks set to remain under pressure in early 2009.

"Flows of credit to the corporate sector remain constrained, and viable businesses are finding the availability and cost of credit very restrictive. The shortage of trade finance is hitting many industries and businesses. The government is going to have to take further steps."

When asked which factors were most likely to prevent business expansion over the next year, 79 per cent of firms cited demand, with 49 per cent concerned about regulation.

Owen Kelly, SFE's chief executive, said: "Given the current economic climate, the general pessimism is not unexpected.

"But it is not all doom and gloom – financial services is a very diverse industry in Scotland and general insurance, for example, is more optimistic than banking. The expected increased resource focused on meeting regulatory requirements is not surprising, but I would hope that we get the balance right. We need better regulation, but we also need to protect the clear benefits for their customers of fair competition between companies."