Financial Services Business Volumes Fall at Record Pace
Business volumes in the financial services sector declined at the quickest rate on record, according to the latest CBI/PwC Financial Services Survey. Profitability and employment also saw sharp declines in the three months to June, due to COVID-19 disruption.
The quarterly survey of 111 firms, conducted between 1st-18th June, showed that optimism about the overall business situation in financial services fell for a second consecutive quarter, albeit at a slower pace than the three months to March.
Business volumes plunged at a record pace in the three months to June, driven by declines in all sub sectors. Financial services firms stated that volumes were on average 12% below those in “normal” conditions (i.e. in the absence of a pandemic). With volumes dropping, spreads continuing to narrow, and non-performing loans rising again, profitability nosedived at the fastest rate since the financial crash. The fall was broad-based across all sub sectors, with only general insurance seeing profits rise.
Additionally, employment fell at the quickest rate since 2010, in line with expectations. This reflected falls in all sub-sectors except building societies and general insurance, where numbers employed were unchanged. Firms also reported that spending on training fell at the fastest pace on record.
Prospects for the quarter and year ahead are expected to be similarly bleak. Despite business volumes expected to stabilise, profitability is set to drop at a similar pace in the next three months, while the fall in employment is tipped to accelerate slightly.
Meanwhile, investment intentions for the year ahead remained negative. Spending on marketing is set to be cut back to the greatest extent since 2009, while expenditure on land and buildings and vehicles, plant and machinery is also expected to be reduced once again. IT spending is tipped to increase only very slightly, marking the weakest expectations since December 2011. Uncertainty about demand was cited as the main factor limiting investment, picking up from the last couple of surveys.
Large companies have made no progress in improving the prompt payment of their suppliers over the last five years, according to latest research by accountants Moore.
The research has found that suppliers are currently waiting an average of 41 days to be paid, the same length of time as in 2015 with no progress in improving endemic problem of slow payment of suppliers in last five years, shrugging off all legislative initiatives. Continous payment delays suggest that legislative initiatives to tackle this issue, such as the UK’s Prompt Payment Code supported by the Small Business Commissioner; and the EU Late Payment Directive, are simply not working. Alternatively, to the extent these initiatives are working the benefit is wiped-out by other late-payers’ behaviour getting worse.
The research by Moore also shows that over 15% of the 113,000 UK businesses covered by the study are having to wait 90 days or longer to be paid. Every year hundreds of businesses become insolvent because of late payments by their customers.
The late payment of suppliers is likely to get worse over the next few months. Some large businesses are already using talk of economic slowdown as an excuse to delay payments even longer and force tougher trading terms on their small suppliers.
The Prompt Payment Code was established to improve SMEs’ financial stability by helping them to recover late payments owed to them more quickly. The Code requires signatories to pay 95% of suppliers within 60 days; to aim towards 30 days, and to encourage good payment practices across supply chains. Many large businesses such as BAE, Diageo, GlaxoSmithKline, Shell and Unilever, have recently been removed from the code by the Commissioner for failing to meet these guidelines.
Duncan Swift, Partner at Moore, said “The data suggests the Prompt Payment Code is not being kept to and stricter enforcement measures are needed to ensure businesses pay all of their suppliers on time. The current ‘name and shame’ tactic is not enough of a stick.”
Businesses in the food supply chain, for example, have been suffering from late payments by large supermarkets for decades.
Since 2013 the Groceries Code Adjudicator has repeatedly called on the UK’s leading supermarkets, that account for over 80% of the market, to change this. However, only 5 of 13 supermarkets are Prompt Payment Code signatories and much of their SME late payment behaviour is masked by their fuel supplies, with oil companies typically being paid within 5 days of delivery. At any given time, the Top 4 supermarkets alone currently have debts due to suppliers over 30 days old of c.£4bn.
Other sectors that have often struggled with late payments include the construction sector, a problem that has contributed to the sector’s remarkably high rate of insolvency.
Moore says if businesses don’t receive payments on time, they might be forced to write off those invoices as bad debt which many cannot afford to do. Slow payment also restricts cashflow and means businesses may not be able to pay their own bills.
Swift adds “SMEs are under extreme financial pressure, with many concerned that they simply do not have enough cash to meet upcoming costs, such as rent and payroll. This pressure is particularly acute in sectors where lockdown restrictions have had an outsized impact, such as construction and manufacturing. Ensuring the timely payment of invoices could play an important role alongside the Government’s new coronavirus lending schemes in ensuring SMEs have the cash they need to survive this trading period.”