The financial services sector in the United Kingdom has registered a growth in the last quarter of 2019 for the first time after a four-year decline. This is as per a survey conducted by Financial Services trade body in United Kingdom, CBI, along with accounting firm PwC as consultants. The survey which was conducted among 94 banks, insurance companies and investment management firms in the United Kingdom found that the business volumes have grown significantly in the sector during the quarter and also expects the volumes to further rise in 2020 after the passage of Brexit event on 31 January 2020.
The financial sector has been the most battered sector in the United Kingdom on account of the Pre-Brexit volatile political and economic headwinds. London, which for centuries has been the trading and financial capital of the world, witnessed the spectre of the financial services industry shrinking in the country due to the parting of ways of the United Kingdom from European Union. London is the European headquarters of several of the world’s largest and most influential financial institutions, which had expanded their businesses by making London their hub. The relaxed travelling restrictions between member countries of the European Union ensured that industry professionals could travel seamlessly without any restrictions, which is one of the primary business requirements in the industry. After Brexit, however, the restriction on movement of people will be greater, making centralized operations across Europe difficult for the industry.
The adverse economic headwinds prevailing in the country ensured that the British economy grew at a decelerated pace over the past few year periods. The banking industry faced the maximum brunt of this slowdown as there was a lower number of transactions and asset quality in general in the country began to deteriorate. The effect of this was that the risk levels in the country increased significantly, forcing the banks to increase their provisioning, which in turn severely impacted their lending capacity. Other than the banking companies, other financial firms like insurance companies and investment management firms also suffered because of decreased business activities. Most businesses in the United Kingdom were either avoiding or withholding any fresh capital investment on account of the uncertainty of the business environment, and the British consumers were also withholding their non-essential spending on account of the same reason. The worst impact, however, was faced by the capital markets in the country and businesses associated with it. The worsening business environment in the United Kingdom kept most of, if not all, foreign institutional investors away from the London Equity markets. The London Stock exchange, which is home to some of the largest British and Non-British multinational companies in the world, started to trade at significantly lower valuations than its other global counterparts. The large services sector of the United Kingdom, which is also heavily dependent on the financial sector, saw a shrinking volume of business over this period. During the period, several banks and financial firms also reported losses and reduced their earnings guidance for future periods significantly.
Towards the end of the year 2019, two important events occurred which changed the course of events in the United Kingdom. First was the passing of the Benn Act which mandated that a deal has to be worked out with the European union first without which the Brexit date has to be extended; and the second was the Victory of Prime Minister Boris Johnson in the British general elections in the month of December 2019. One of the primary reasons for the adverse economic climate in the United Kingdom was on how the Brexit breakaway process will actually unfold. The uncertainty had taken a heavy toll as the businesses in the country which were unable to foresee what the future might entail. The lawmakers, on the other hand, were constantly in a state of disagreement with respect to the details of the draft deals successive governments introduced in the British parliament for debating, which led to the non-acceptance of three draft agreements during the period and the fall of the Theresa May Government. Boris Johnson, who had come to power in 2018 on the mandate of meeting the erstwhile Brexit deadline date of 31 October 2019 at any cost also negotiated a draft Brexit deal with the European Union officials though he was unable to meet the tentative deadline. Hence, he recommended the dissolution of the British parliament with the general elections scheduled to take place on 12 December 2019. The results of the general elections, however, gave Prime Minister Johnson a clear mandate paving the way of the passage of the draft bill that he has agreed with the European Union.
The chain of events thus started rolling with the passage of the Benn Act pushed the British economy into high gear, and many of the important economic indicators started to trend upwards. The consumer confidence index, house prices index, and hiring index all have started trading in the positive zone by the first half of December 2019. With the improvement in business activity, the expectations of the British businesses have also increased, who have now commenced to invest in future growth opportunities. Just prior to the general election date, the bank of England had conducted a stress test of most of the major banks in the country and had found that they were adequately capitalized and had sufficient funds with them to be able to see through any eventuality that Brexit might lead them into. This, perhaps, could have been an early sign that the industry was ready for a pick-up as soon as the general conditions improved in the country.
The increase in business activity in the financial services industry in the country is a testament to the above. The most important event that is expected to have the profound impact on the economic future of the country is yet to happen on 31 January 2020 when the United Kingdom formally exits the European Union. The headwinds then will dictate how the business is going to be for different industries in the United Kingdom in 2020 and beyond.
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