2024 financial services industry predictions

31 January 2024

Our clients in financial services continue to experience geopolitical and macroeconomic uncertainty. So, what does 2024 hold for them?

The term ‘Team transitory’ won the battle to best describe the sudden surge in inflation, which is now dropping sharply in all developed economies. Although central banks’ reaction is currently a cautious one, we have sustained positive real interest rates for the first time in a couple of decades. Markets now expect interest rates to fall fast by the summer.

If investor sentiment can see through geopolitical uncertainty caused by Ukraine, Gaza and an unprecedented number and scale of elections across the developed world, the overall outlook for our client base may slowly improve. Although, businesses such as banks which have benefitted from high interest rates may see reduced tailwinds.

Continuing resilience in M&A

The UK financial services industry saw an 18% reduction in deal volumes during 2023 but valuations remained strong. Wealth management and insurance saw strong deal flow. We have continued to see consolidation by large trade acquirers and private equity investors to capitalise on the opportunities created by technology and regulatory change. 

London mergers and acquisitions (M&A) practice lead, Natalie Ord stated: 'Looking ahead to 2024, economic stagnation and ongoing political uncertainty means headwinds are set to continue. However, as an industry known for innovation, we expect resilience in financial services and continuing capacity to leverage technology to drive M&A activity. Acquisition targets with scalable technology propositions or data-driven approaches will be sought after and attract the highest valuations.'

Jasper van Heesch, director in our private equity team, says: 'As we head into 2024, private equity deal count in the UK will not continue its recent decline, but rather stabilise in the first half and start rising towards the end of the year, continuing upwards in 2025.'

Opportunities in real estate 

Commercial property values have dropped by 20% since Covid, which brings benefits and opportunities for buyers. For example, we are likely to see increased investment by private equity funds in commercial space, office space with good ESG credentials being the most desired target.

According to Stacy Eden, our industry head for real estate 'during an economic downturn, London and the south-east typically see more investment as they are seen as stable areas. I see Canary Wharf as particularly interesting, and I expect pricing adjustments or repurposing of space there.'

Tight labour market to loosen?

As with most industries, regulated financial services businesses are dealing with a tight labour market across all sub-sectors. Similar to the US, the UK is seeing more of the industry workforce get closer to retirement age with fewer entering it. Businesses will be focusing on how to attract and retain key talent in 2024 but we expect investment in technology and AI to fuel worker interest in the industry. 

The wider labour market has turned a corner recently. The unemployment rate has risen to 4.2% from 3.7% at the start of 2023 and vacancy numbers have dropped below one million for the first time since January 2021. This easing is likely to continue in 2024 with the unemployment rate set to reach 5%. This will eventually translate into slowing wage growth. Admittedly, there are now significant questions around the accuracy of the labour market data. That all said, the labour market is still tight by historical standards, especially for a time of prolonged economic weakness.

Tom Pugh, RSM economist, says: 'Given we expect economic growth to remain subdued at best over the next year, hiring is likely to remain low. At the same time, labour supply should continue to improve as the impact of the cost-of-living crisis and increasing real wages tempt more people back into the labour force.'

Banks respond to falling interest rates

As interest rates start to drop, banks’ margins are unlikely to continue widening. As borrowers coming off fixed rates reprice onto higher rates, any upside for the banks will face headwinds in the form of rising arrears and impairment charges. 

Banks will turn elsewhere to protect margins. There is scope for efficiencies on the balance sheet - for example through hedging - as well as opportunities for agile players to deploy surplus capital on acquisitions.

'The pace of regulatory change will pick up again as banks continue detailed preparations for Basel 3.1 which will be implemented in 2025. This looks to be a test case for how UK regulators might permit divergence from some EU rules. Along with the UK’s "strong and simple" regime for less complex Small Domestic Deposit Takers, these changes will require firms to revisit strategy given the projected shift in capital requirements for some common classes of lending,' stated James Roberts and Gavin Sharpe, from our prudential regulation team.

Regulators focus on financial crime and consumer duty

Reducing and preventing financial crime is one of the FCA’s focus areas. Consequently it has tightened financial crime supervision. In 2022/2023 the FCA opened 613 financial crime supervision cases, an increase of 65% from the previous year.

Financial crime is a key regulatory risk. In 2022 fines relating to financial crime made up 66.7% of the total fines issued by the FCA. Regulated firms will need to respond by ensuring financial crime controls are compliant.

In July it will be a year since the introduction of Consumer Duty for ‘open’ products with businesses expected to have implemented their fair value frameworks, along with a clear plan of assessment of the duty. Firms with ‘closed’ products will also have to ensure their products meet Consumer Duty expectations by the end of July.

Catherine Brittain, regulatory Partner, says: 'Regulated businesses should also be aware of The Worker Protection Act 2023 which will impose a new duty on all employers to take reasonable steps to prevent sexual harassment of employees in the workplace. This new act has prompted a consultation from the FCA into non-financial misconduct; this closed at the end of 2023 and firms should expect new reporting requirements towards the end of 2024.'

Peter Allen
Peter Allen
Partner, Head of Financial Services
Peter Allen
Peter Allen
Partner, Head of Financial Services