Financial Services: Seeds of doubt sown by sceptics: Paul Gosling examines a report which suggests that financial services may not be the growth industry this decade that it was in the 1980s

The latest quarterly survey conducted jointly by the CBI and Coopers & Lybrand shows a healthy increase in profits and optimism in the financial services sector. While employers are still shedding staff at a high rate, job losses could begin to level off in most parts of the sector, with only the banks increasing the pace of labour cuts.

Staff costs have now dropped to the lowest proportion of total costs since the survey originated, five years ago. Meanwhile, income from fees, commissions and premiums rose at its highest rate.

Sudhir Junankar, the CBI's deputy director of economic affairs, says that most of the job losses in recent years stemmed from the failure of companies to cut back on labour sooner, despite heavy investment in information technology. Most parts of the financial services sector have now come to terms with that fact, although 'insurance companies may have yet to deal with these changes'.

According to the CBI survey, British financial services firms now regard themselves as better able to withstand increased competition from European and non-European entrants to the UK market. Other analysts forecast a less buoyant future, though.

A recent report, A Reversal of Fortune?, written for South East Economic Development Strategy (Seeds) by Andrew Leyshon and Marion Justice of Hull University and Nigel Thrift of Bristol University, argues that the numbers employed in the financial services sector will continue to decline, with too many companies fighting for too little business.

The Seeds report suggests that there are deep-seated trends which mean, says Mr Thrift, that 'financial services is not, on the whole, going to be the growth industry in the 90s that it was in the 80s'.

The report points to demographic trends working against the interests of the industry. As the population gets older there will be fewer sales of life insurance policies, pensions and mortgages, for example. Meanwhile, as more younger adults choose the single life, they will be less likely to purchase life insurance.

Meanwhile, the number of European entrants into the UK market will severely damage British businesses. The long-term decline in jobs in the financial services sector has, so far, been mitigated by new entrants to the market. The shake- out in the sector will take several years to unfold, and the end result will be a smaller sector, with fewer employees, suggests Seeds.

What has been particularly damaging to the insurance sector is that high claims, caused by the industrial and property recession and bad weather, have coincided with a period of low margins because of incoming competition, and a consequent decline in underwriting standards. An increasingly assertive and litigious population has also driven up claims levels.

The Seeds report expects many companies to concentrate increasingly on their most profitable activities, leaving marginal communities without any financial service provision. Mr Thrift says: 'The financial services industry is under pressure, and this could cause problems for many people served by it. We are concerned that it could roll back into its heartland of the middle classes, focusing on operations where there are substantial profits. Certain sections will find it increasingly difficult to obtain financial services.'

The growth in telephone banking and direct insurance, where well- off customers are targeted with cheaper services, can be seen as a trend that will be copied across the financial services sector. While Mr Thrift declines to predict that Britain will become like the United States, where poorer areas are uninsurable, he says that it is a possible outcome. Mr Thrift adds that already the effect of upward pricing for high-risk groups is encouraging many people to reduce their insurance cover.

Mr Thrift says the report simply reflects the mood of the industry itself. 'It is difficult to see where growth will mostly come from. I don't see how one can avoid being pessimistic.'

Angus Hislop, partner in the financial services and city office of Coopers & Lybrand, takes on board some of the arguments of the Seeds report, but sees the picture more positively. He says: 'If you are an employee you may not be optimistic, but if you are a shareholder perhaps you have reason to be.'

Mr Hislop believes that insurers, in particular, face a tough time. 'The next few years on the life insurance market will be full of turmoil, with the increase in the numbers of people selling products, insurers selling directly, banks and IFAs.' New disclosure requirements will also make the market highly uncertain, he says.

He sees the longer-term prospects in much more rosy terms. 'There is a need for life insurance, and penetration is not particularly high by American, Swiss or German standards,' he argues. 'Not all the players will survive though, because of the need for more investment. Some at the margins will decide it is not worth it. Banks and building societies like the Halifax will be big players, and their impact will be pretty substantial.'

Unlike the Thrift report, Coopers & Lybrand sees changing demography to be a positive factor on the life insurance market over the next 5 to 10 years. Analysis of policy sales, says Mr Hislop, shows the 45-to-55 age group to be the leading purchasers, and they will increase in number over the next decade.

Mr Hislop accepts that companies will retreat to activities of highest profit, but believes that, at least in the long term, this will not exclude any sections of the population. 'In the short term, people could start to withdraw from certain communities, but that makes opportunities for others, who will come in with new cost structures.' New direct insurance operations, targeting high-risk customers, are being established, he points out. 'Given time in a free market I don't see why anyone should miss out.'

The Banking, Insurance and Finance Union (Bifu) has been vigorously complaining about job losses in the financial services sector, and might be expected to share the concerns of the Seeds researchers. Instead, Bifu agrees with the CBI's outlook, of higher profits, and long- term health, although expecting further job losses, especially in banking and insurance.

(Photograph omitted)