Business leaders in the financial services sector are feeling optimistic moving into 2024, according to new research from KPMG UK. The survey of senior executives working in the sector found that 87% are “confident” when it comes to overall business growth in the first quarter of 2024, supported by a buoyant outlook on profitability for the quarter (83%).

Those working in banking, asset and wealth management are the most optimistic about business growth in Q1 of next year (89%), followed by insurance executives (79%), who continue to face challenges with reinsurance capacity and supply chain inflation.

Inflation and interest rates deemed to be biggest challenges

While a majority (61%) have a broadly positive outlook for the UK economy going into 2024, more than half (56%) believe inflationary pressures will still pose the biggest challenge for their business in the first quarter. This is followed by 46% citing interest rates as the most pressing challenge. While more than a third (37%) believe cost pressures will be their biggest issue, 85% are confident they can manage business costs, such as rising energy bills, throughout the quarter.

Despite ongoing political uncertainty and ongoing conflicts around the world, geopolitical risks were ranked lower than economic concerns, with just 21% believing this will pose the greatest challenge to their business in the first quarter.

Commenting on this, KPMG global and UK head of financial services, Karim Haji, said: “It’s great to see financial services leaders go into the New Year feeling confident despite ongoing economic turbulence, which is set to continue to challenge the sector in the first quarter.

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“While on the surface, leaders seem less concerned about the specific impact of geopolitical uncertainty, there’s no denying that it is in part adding to inflationary and interest rate pressures. With interest rates set to stay high in a bid to tackle persistent inflation, combined with the added uncertainty of looming elections in the UK and USA, it will be interesting to see what impact this has on sector confidence beyond the first quarter.” 

Mixed views on the UK’s future as a global financial centre

While a majority of leaders (73%) across financial services are confident when it comes to the view that the UK can maintain its position as a global financial centre over the next three years, perspectives vary between different parts of the sector. 84% of banking executives are confident that the UK can maintain its position but more than half (53%) of insurance executives are not, followed by more than a third (37%) working in asset and wealth management.

Executives point to reducing regulatory pressures, tackling inflation and interest rates, and overhauling the tax system as key areas to address to help the country maintain its position as a leading financial centre.

Haji further said: “Despite changes to listings rules, fewer international firms are choosing to list in London and some UK domiciled brands are looking to list elsewhere. This is creating some uncertainty over the City’s future position as a global financial centre.

“As we go into 2024, we are seeing a promising direction of travel from the Edinburgh Reforms package in the bid to boost competitiveness. While the Treasury Committee has highlighted that change is not happening quickly enough, part of the attractiveness of the UK is that our regulatory system is relatively stable. This, together with a plan for enhanced competitiveness will safeguard the UK’s future position on the global stage and boost long-term growth.”  

Sector focused on addressing hiring and retention challenges in 2024, followed by employee mental health and diversity and inclusion initiatives

While most executives (79%) are confident that they can hire the skills they need in the first quarter of next year, recruiting and retaining talent, and boosting skills are among the biggest workforce investment priorities in 2024. These are followed by improving employee mental health and wellbeing, and accelerating diversity and inclusion programmes.

In advance of the publication of the FCA’s diversity and inclusion (D&I) policy for financial services expected in early 2024, the sector shows signs of potential over-confidence when it comes to the progress of its D&I strategies. Over half (55%) feel they are ahead of other companies in the sector and more than a third (38%) feel they are on par with their counterparts. Leadership accountability was ranked by most (36%) as what is needed to help improve their D&I strategies, followed by in-person training (34%) and employee networks (33%).

The majority (38%) feel that ethnic diversity is the area of D&I that the sector needs to focus on most in 2024, followed by gender and socio-economic diversity (33% respectively).

Haji concluded: “It’s interesting to see the confidence in the sector when it comes to progress being made on D&I policies – and it’s important to point out that this is a subjective view and perhaps a sign that leaders need better external assurance on how they compare against competitors.

“Understandably the sector is most focused on investing in workforce areas that have a more direct impact on near-term profitability and growth. But this can’t come at the expense of initiatives that support broader employee and societal needs such as mental health and D&I, which are integral to the long-term success of the sector.

“While leaders in financial services believe their D&I strategies are up to scratch, it’ll be interesting to see what these look like against the FCA’s new regulatory framework next year. Whilst there seems to be strong support for the need for progress, there are some questions being raised by industry leaders on the need for mandatory disclosures.”