Financial sector growing fastest since 2007

Britain's financial services industry is growing at its fastest rates since September 2007, a CBI and PricewaterhouseCoopers survey will say today, while warning that increasingly tough regulation could choke off the recovery.

As the sector's confidence steadily grows there are several dark clouds on the horizon that could knock it back, the most notable being the eurozone sovereign debt crisis and the Bank of England's warning that British banks face an £850bn funding gap.

The CBI/PwC survey – in its 83rd edition – shows that the sector enjoyed its fourth consecutive improvement in profitability during the three months to June. Some 38 per cent of respondent companies said business volumes rose in the three months to June. In contrast, just 29 per cent reported a fall. The resulting positive balance of plus 9 per cent is the best result since September 2007. And 63 per cent of firms also expect to see a rise in business volumes in the next three months – the best since December 1993.

Banks are also still expecting to recruit staff in the current quarter. If so, the sector will see the biggest rise in financial services employment since December 2007. The pace of lay-offs also declined over the past quarter.

But the CBI says the figures are not as positive as had been expected and warns that there are real fears that future regulation and new laws could damage confidence. The improvements have been driven by life insurers, stock brokers and fund managers, while general insurers and building societies have seen only flat volumes. Banks actually reported falling business volumes, although their profitability continues to rise.

Andrew Gray, the UK financial services consulting leader at PwC, said: "The generally upbeat outlook for banks of growing revenues and profitability is being overshadowed by the looming threat of regulation on the sector.

"While banks may be confident in their own business models, they are unsettled by their operating environment; where regulatory shake-up, levels of future demand, competition from new entrants and political intervention are weighing heavily on their minds."

John Cridland, the deputy director general of the CBI, said: "The survey was conducted when financial markets were feeling the intense strain from fears over euro area sovereign debt and, for the first time in over a year, a notable minority of firms were worried that the risk of further market deterioration is high."

The survey also found that total operating costs – excluding the cost of funds – fell faster than expected, at the highest rate since December 1993. Average operating costs per transaction fell at the record pace of minus 51 per cent, which will have been helped by the modest rise in business volumes.

The number of firms reporting concerns about the impact of legislation on their ability to expand in the next 12 months remains high (62 per cent), following the previous quarter's record level of concern (74 per cent).

Meanwhile, the percentage of firms forecasting a high likelihood of further deterioration in financial markets has risen to 23 per cent, the highest level since the start of 2009. Firms in the insurance sector are particularly pessimistic. But the majority of firms in most sectors do not expect normal conditions to return in the next six months.