The research found that business volumes and optimism in the sector continued to grow at an above average pace but more slowly than in the previous quarter.

Weaker overall growth mainly reflected a fall in volumes among building societies and stable volumes in the banking sector.

Trends in financial services incomes varied, with the value of fees, commissions and premiums falling from the previous quarter, weighed down by poor results among banks and building societies. However, net interest, investment and trading income continued to grow at a healthy pace.

Meanwhile there was a sharp increase in total costs, but non-performing loans continued to fall and firms managed to keep average costs under control. These factors, combined with decent growth in business volumes, meant that profits increased at their fastest pace since March 2011, and rose across all sectors.

Overall business volumes were expected to grow at a slightly faster pace next quarter and profits have been predicted to increase in most sectors, with the exceptions of banking and building societies.

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Rain Newton-Smith, CBI director of economics, said: “Demand for financial services continues to strengthen, with profits holding up and employment showing signs of an improving trend.

“But the cost of regulation and tax uncertainty are a top concern for firms across the sector. They want to see the Government focus on keeping the UK a competitive financial centre by not putting UK firms at a disadvantage.

“Meanwhile, in the Eurozone, negotiators need to move quickly towards a new bailout programme that secures Greece’s finances for the long term, but is also realistic in terms of Greece’s ability to pay and carry out meaningful structural reforms.

“Looking ahead financial services businesses are planning to ramp up their marketing spend to try to reach new customers, as competition from new entrants and from other sectors intensifies.”

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Key findings:

When asked to rank their top priorities for the new Government firms said it should be:

◦ 1. Reducing the cost of regulatory compliance.
◦ 2. Ensuring tax stability for the financial system.
◦ 3. Promoting financial literacy among households and businesses.

• 33% of financial services firms said they were more optimistic about their overall business situation than three months ago, while 1% said they were less optimistic giving a balance of +32%. That compared with +50% in March.

• 35% said business volumes increased in the three months to June, while 17% said they decreased, giving a balance of +18%

• Next quarter 41% of firms expect business volumes to increase, while 2% expect them to decrease, giving a balance of +39%.

Incomes, costs, profits:

• Income from fees, commissions and premiums decreased (-20%), after a solid rise (+46%) in the previous quarter. Growth is expected to return next quarter (+28%)

• Income from net interest, investment or trading income increased (+34%), at a similar pace to the previous quarter. It is expected to grow at much slower rate next quarter (+6%)

• Total operating costs increased (+47%), but the value non-performing loans decreased (-42%) and average costs decreased slightly (-7%)
• As a result, profits grew at their strongest rate (+61%) since March 2011 (+62%).
Employment:

• 24% of financial services firms said they had increased employment, while 11% said headcount had fallen, giving a balance of +13%. Employment is expected to increase at a similar rate next quarter (+12%).

The next 12 months:

• In the year ahead financial services firms expect to ramp up spending on marketing (+58%) – the highest balance since March 2011 (+67%)

• Investment in IT is expected to increase (+38%), but at the slowest pace since December 2013 (also +38%)

• Meanwhile, investment in land and buildings and in vehicles, plant & machinery are both expected to decrease (-42% and -3%, respectively)

• Increasing competition, and statutory legislation and regulation, were the factors cited as most likely to limit business expansion over the next twelve months (75% and 67%)

• Firms reported various drivers of capital expenditure over the next 12 months, but the share of firms citing the desire to reach new customers (68%) was particularly high compared with its long-run average.