Financial Services And Markets Group Bulletin - Weathering The Storm

Author:Mr Giles Murphy
Profession:Smith & Williamson



Natasha Lee explains the results of our latest survey of

the financial services sector, which indicate a bleak outlook for


For the second year in a row, the Smith & Williamson annual

survey of FSA-regulated businesses shows a decrease in business

confidence. However, this decline has accelerated substantially,

with 56% of respondents reporting a drop in profit margins. Even

more unsettling is the news that 62% of participants believe that

London's reputation as a financial centre has fallen since last


Business Confidence

Now in its 11th year, the survey collects the opinions and

expectations of financial services businesses in the City of

London. This year, 44% of respondents expressed that confidence in

their business prospects had decreased or strongly decreased over

the last year, which is in contrast to 2007, when 49% were

reasonably confident and only 18% were not. Last year's survey

showed the first decrease in business confidence in 5 years. While

the latest survey does not compare like-for-like questions with the

2007 survey, it does illustrate that the confidence of the sector

has plummeted over the past year.

Fig 1: Business Confidence

According to 62% of respondents, London's reputation as a

major financial centre has decreased over the past 12 months. This

shows a significant shift from 2007, when 88% of respondents agreed

that London had strengthened its position as a key financial centre

over the last five years. It is expected that New York or Dubai is

more likely to take over the mantle as the world's financial


While the results are more negative than in previous years, the

respondents appear to believe that they can weather the current

storm. When questioned more closely about their experiences in 2008

and what their expectations were for 2009, they revealed what

appears to be a varied outlook. For example, 38% of respondents

have seen the volume of their business decrease in the past year,

while 56% of respondents report a stable or increased volume of

business in the past 12 months.

Fig 2: Change In Business Volume Over The Past 12


While 56% reported decreased profit margins and 38% a decrease

in turnover, 39% of respondents are expecting stable turnover and

26% are expecting an increase in turnover in 2009. This shows a

dramatic contrast to the 2007 survey results, where 54% expected

turnover to increase and only 4% expected a decrease.

Fig 3: Turnover Expectations: Comparison Of 2007 And

2008 Results

Considering the results above, it is unsurprising that,

generally, respondents are not expecting an increase in their

headcount, with nearly a quarter forecasting redundancies. For some

firms this will be a new experience that will give rise to tax and

legal issues that will need to be addressed. The overall message

from respondents in respect of headcount is consistent with a low

level of anticipated growth.

In respect of capital expenditure, a decrease is expected by 43%

of respondents, while 41% expect it to remain the same and 16%

expect an increase over the next year. However, 95% of the

respondents expect expenditure on regulatory compliance to remain

the same or increase. This appears to reflect a lack of growth,

making firms more conscious of their expenditure. As a result, only

necessary expenditure will be made, rather than discretionary or

investment expenditure.

With the expectations for financial services businesses

appearing to remain on an even keel through 2009, it must be that

businesses in the sector are planning on making cuts elsewhere. The

survey shows that more than half of the respondents expect a cut in

discretionary spending in 2009. Spending on 'optional'

services is likely to be downsized over the next 12 months, and

marketing budgets could well feel the pinch.

Tax Issues

The results from the survey in respect of tax...

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