Financial Services: 2023 overview and what lies ahead

Adam Gates, Becky Mackarel and Richard Plaistowe from our Financial Services practice provide an overview of 2023 across Insurance, Banking and Asset & Wealth Management – plus a few pointers on trends we are likely to see in 2024.

With both a rearview mirror and crystal ball to hand, we stand ready to dissect this year’s trends and venture some prognostication on how they may play out in the coming 12 months. Truth be told, none of us really know our way around a crystal ball and as we are not end-of-pier-mysticism types, we are instead basing our predictions on data and market knowledge. Apologies if that is a little staid for the festive season.

Now it’s time to talk turkey, Or rather…

Insurance

Many insurers found 2023 to be a challenging year, largely due to continued high inflation and its corollary of reduced consumer spending. Geopolitical factors and regulatory change also played a part.

However, there are differences at a sub sector level.

In personal lines (motor, home, pet and travel) 2023 has been especially challenging off the back of record losses in 2022. EY’s UK Home Results Analysis identified 2022 as the worst performing year on record for the UK home insurance market, with a loss-making Net Combined Ratio of 122%. We anticipate this will continue into 2024. Major contributing factors have been inflation, supply chain issues, pricing reforms and climate change resulting in, for example, high storm and flood damage claims.

In life and pensions however, there has been stronger performance due to high interest rates together with the de-risking of the pension market. Bulk annuity players such as Pension Insurance Corporation (PIC) and Rothesay have experienced year-on-year growth. Post-Covid we have seen steady increases in demand for individual annuities and workplace savings products, and therefore relatively strong performances from the likes of Legal & General, Phoenix and Scottish Widows. 

In the commercial and specialty Lloyds and company markets, we’ve seen a record quarter-on-quarter hard market; meaning continued growth, accelerated by geopolitical conflicts and again climate change. However, many specialty insurers are bracing themselves for a soft market next year and slower growth. Even so, there has been an increase in investment in operational and technology leadership to ‘sort out’ infrastructure issues that are a barrier to scaling up. Many commercial and London market re/insurers have rickety operational structures and technology which has been underinvested in over the years, and/or tech challenges arising out of the integration of acquisitions. Consequently, as a business we are experiencing demand for transformational COOs and CIO/CTOs adept at fixing such issues.

Two ubiquitous topics across all of insurance are AI and Consumer Duty, the latter being the major FCA directive that puts Fair Value and Good Consumer Outcomes at the heart of organisations. AI is being viewed with caution and the jury is still out on whether it will be ‘friend or foe’. We shall see what 2024 brings.

The interim executive recruitment market has buoyed in the last few months and we have seen demand across risk, operations and technology following some high profile moves, causing a domino effect in terms of gaps in management teams. We expect a continuation of that through 2024.

Banking/Payments Businesses

Higher interest rates coupled with economic uncertainty ensured 2023 was a challenging year and led to many businesses moving their focus to cost which has had an impact on hiring. Some of the larger banks sought to reduce costs, and therefore headcount, while many PE-backed and early-stage businesses have struggled to raise funding. It will be interesting to see whether there will be more funding available in 2024 to allow these businesses to thrive and grow.

Pressure on lenders has relaxed somewhat as increased interest rates help bolster their bottom line. However, due to higher costs of deposit, many banks expect to see their Net Interest Margin (NIM) begin to fall in 2024.

Mortgage providers are only starting to see the impact of rising interest rates on their customers, given the number of fixed rate mortgages still to reach the end of their timespan. Levels of arrears and foreclosures are lower than some predicted because many borrowers are making other financial sacrifices to ensure they can pay their mortgage. The industry sentiment is that the key factor to affect this is if employment levels fall, the level of arrears will increase. The slowdown in the property market is expected to carry on in 2024, reducing the number of new loans and this will affect these businesses.

Payments businesses are seeing slightly lower levels of transactions and changes in consumer behaviour are evident, with individuals looking at cheaper brands and outlets to save money. For example, some consumers who shopped at Waitrose historically may have switched their main shop to Tesco to save money – while some Tesco shoppers are moving to Aldi etc. Levels of expenditure are falling, although volumes are not.

Although banks implemented their Consumer Duty requirements earlier in 2023, there is concern as to how the regulators will approach enforcement. Perhaps we will see some test cases brought forward in 2024.

Banks themselves have weathered the predicted storm we saw earlier with the crises that engulfed Silicon Valley Bank and Credit Suisse at the start of the year there were concerns that other banks would follow suit. Fortunately, we have not seen this trend continue.

With the continuing growth of digital payments and move away from cash, there will be an increase in threats from fraud and cyber-attacks, which in turn will further increase the focus on risk mitigation How banks manage this will influence their customers’ views. We will also see more discussion on digital currency and the potential introduction of Britcoin in the years ahead. As with Insurance, organisations are still assessing how AI can support their businesses and there remains caution and concern around what it can do and how to take it forward.

Next year will see the US Presidential Election and almost certainly a General Election in the UK (it must be held no later than 28 January 2025). Potential changes in government can create uncertainty for businesses, particularly around the regulatory space and economic environment.

From an interim recruitment perspective, we saw many organisations expand their employee base in 2021/22 as we moved on from the pandemic. Much off this hiring was growth focussed and the reality of 2023 was that this growth did not occur. The upshot is that many businesses reviewed their leadership teams to ensure the right people are in place for the future.

This has given us many opportunities to appoint interims to cover the gaps and allow businesses to assess their longer-term hiring strategies across their head office functions, particularly within Risk, Finance, Compliance and HR. We have also seen a rise in change and transformation roles as businesses look to get their organisational structures in the right place as they move forward over the next couple of years.

Asset & Wealth Management

PwC’s 2023 Global Asset and Wealth Management Survey concludes that by 2027, 16% of existing asset and wealth management (AWM) organisations will have been swallowed up or have fallen by the wayside – twice the historical rate of turnover. This comes as no surprise and squares with what we have seen in the market.

Acquisition and consolidation in this space has kickstarted a wave of enterprise-wide digital and culture transformation programmes. From 2024 onwards, there will be a big focus on embedding change, fixing problems and upgrading the Exco to futureproof firms.

Investment stance and behaviour in relation to Environmental, Social and Governance (ESG) remains high on the agenda and calls for the right expertise, which is not easy to find. Regulatory pressures must be balanced with meeting investor expectations.

There is an appetite for seasoned interim executives who possess a proven track record of delivery. Talent of this order can support Excos in assessing longer term hiring strategies across head office functions, we have seen a demand across all functions but particularly within Risk, Finance, Compliance, Technology, Operations and HR.

A demanding year lies ahead and, with wellbeing/fatigue a key theme on leaders’ minds, astute AWM firms will also be tapping into the interim executive community for support, advice, mentoring and coaching to relieve burnout pressures.