The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

From Brexit and the pandemic to soaring inflation and rising interest rates, the past few years have compelled firms to reassess, adapt, and refine their strategies. To gain a clearer picture of how these challenges are impacting the sector, Davies commissioned a survey in May 2024, gathering insights from 501 senior decision-makers within financial services companies.

So, how do firms perceive their current performance, and what are the challenges facing them in the coming year?

Confidence is remarkably high

Since December 2021, financial services businesses in the UK have been forced to contend with a shift to a higher interest rate environment than they had become used to in the 2010s, with the base rate rising from a record-low 0.1 per cent to 5.25 per cent in August 2023.

The Bank of England recently voted to cut rates to 5 per cent but, combined with an eye-wateringly high inflationary environment for much of the last two years, firms have faced an incredibly challenging economic climate. Given this, the data reveals a remarkably positive picture.

For instance, the vast majority (89 per cent) of decision-makers surveyed rated their firm's performance over the past year as either ‘good’ (50 per cent) or ‘very good’ (39 per cent). Moreover, another 89 per cent of respondents expressed confidence in their business's prospects for the next 12 months.

This optimism persists despite the ongoing economic uncertainty, as the sector and the broader economy continue to deal with the cost-of-living crisis, interest rate fluctuations, wage pressures, and geopolitical tensions.

That said, with 11 per cent not expressing confidence in their firms’ performance, there remains a degree of caution in their outlook for the year ahead.

Confidence in the coming year is lower

To explore where this caution may stem from, respondents were given a list of challenges that their business might be encountering at present, asking them to select what they considered the most pressing (respondents could select up to three).

Unsurprisingly, economic turbulence emerged as the top concern, with 44 per cent of decision-makers highlighting it as a major issue. This was closely followed by regulatory compliance (43 per cent), cybersecurity (38 per cent), technological disruption (26 per cent), and talent acquisition and retention (24 per cent).

Other significant challenges included keeping up with customer expectations and political uncertainty, both at 22 per cent, and a lack of digital and data skills within the business (19 per cent).

The fact that all eight listed challenges received substantial responses illustrates a key point. There is a wide range of obstacles businesses face today, including challenges in relation to almost all areas of a business, such as people management, technology, and regulatory compliance.

As such, it’s important that firms remain agile and proactive as they navigate these headwinds.

The rate cut from BoE provides an opportunity to invest and improve

The Bank of England’s decision to cut the base rate should provide them with the stability and confidence to do so, potentially providing financial services firms with the opportunity to invest in their teams, enhance their operations and strengthen client relationships.

Employee development, as always, will be key. Without a team that are equipped with the necessary skills to drive growth and successfully incorporate emerging technology, firms risk being left behind. Connected to this is enhancing their ways of operating by leveraging new technology like AI and ML. Not only can this improve efficiency, but it can help to mitigate the impact of technological disruption and improve regulatory compliance as well.

To briefly conclude, the resilience and confidence demonstrated by the industry in our survey offers a promising outlook. The ability of firms to adapt to high interest rates, regulatory demands, and technological disruptions underscores the sector's strength and strategic agility, but we cannot take our finger off the pulse.