Growth in financial services gets back to pre-banking crisis levels

News that the UK’s banks and investment firms are enjoying growth on a scale similar to that during the heady days of summer 2007 – before the collapse of Northern Rock and the subsequent banking crisis – comes as the Square Mile prepares for a fresh battle with the UK government over executive pay.

Prime Minister David Cameron has promised a crackdown on the “merry-go-round” and “crony capitalism” in the City that has allowed pay for FTSE 100 directors to surge 49 per cent in the last financial year, while most other workers are struggling with below inflation rises or pay freezes.

Financial services firms in particular are braced for another bruising encounter with politicians over remuneration as bonus season looms.

According to a survey published today by the CBI and accountancy firm PwC, the volume of business in UK financial services grew for the seventh consecutive quarter at the end of last year and at the fastest pace since June 2007.

Although there are concerns over business levels this year as the eurozone crisis plays out, the volume of work seen at the end of 2011 had returned to “normal”, according to survey respondents, after being regarded as below normal since September 2007.

Ian McCafferty, CBI chief economic adviser, said: “This has been a strong quarter for the financial services sector, with increases in sales volumes and profits showing that the sector’s recovery is on track.”

However, the business group is keen to stress that the sector is far from being clear of the woods, and firms are expected to reduce investment over the coming year. Employment levels are also expected to drop over the next three months as eurozone woes put a severe dampener on confidence.

McCafferty warned that “firms are less optimistic, employment is down and investment intentions for next year are weaker, as concerns about the global recovery and ongoing troubles in the eurozone create uncertainty”.

But he added that companies are still expecting business volumes and profits to continue to grow, “albeit more slowly, in the next three months”.

Banks in particular are concerned about how new regulation and costly rules to boost competition in the sector will affect their business.

The report says that in banking there is “an increasing disconnection between pessimism and performance”.

It adds: “The banks are increasingly concerned about competition. This reflects the fact that the current quarter has seen not only the publication of the Independent Commission on Banking’s final report, but also the sale of Northern Rock to Virgin Money.

“Add to this the anticipated sale of more than 600 Lloyds branches, and it is not surprising that almost all respondents see competition as a growing threat.”

Under Cameron’s proposed reforms, shareholders would have to approve salary packages and bonuses for those at the top of listed firms.

The government is keen to crack down on pay for underperforming directors, whom Cameron said were allowed to “fill their boots” under the present system.