Typically, this is a time of year when we look forward and try to predict what the new year may have in store. The current volatility in the global and domestic market makes it especially fraught to predict the future, however, our Financial Services team have taken the time to think ahead to what might lie in store for the sector in 2024.

General FS trends:

In our recently launched FS survey report, respondents, all in UK FS senior leadership roles, expect the sector to continue to face three primary challenges:

• macroeconomic instability (44% respondents)
• cyber security attacks (36%)
• increase sustainability (27%)

With further quantitative easing unlikely it remains to be seen how the economy is managed, especially if 2024 heralds a change of government at Westminster. If economic growth continues to be elusive, inflation remains above the 2% target, and unemployment increases, then firms will have little alternative but to reduce their spiraling cost base by reducing organisational complexity and lowering their ‘cost to serve’. Optimising costs, rather than indiscriminately enforcing ‘across the board’ cuts, should be an organisational priority.

Against a backdrop of governmental short-termism, low capital investment and centralised micro-management, in 2024, successful FS firms will require to do the opposite to counter this negative macroenvironment. The last decade has demonstrated that firms that invested for the future and encouraged innovation whilst reducing command and control culture, especially those with scale, have fared better than peers who have not embraced this approach.

In 2024, strategic investment will continue to focus on technology infrastructure and business intelligence, including artificial intelligence (AI). We expect major financial institutions to adopt quantum computers for faster processing of large datasets. Rapid advances will take place in processing data enabling improved risk assessment and decision-making, evidencing customer outcomes, and detecting fraud. Against this backdrop we also expect intensified debate around how AI can promote productivity and economic growth whilst also considering how regulation can promote AI safety and ethics.

On the back of Consumer Duty, we expect to see intensified regulator interventions and increased competition based on customer experience and price driving firms to adopt a more customer-centric approach and enhance their products and services and offer greater customer value. To achieve this, we expect firms to increase their engagement with target customer groups by involving them in product and journey design. Also, they will move beyond Net Promoter Score and measure customer trust to evidence the customer outcomes they provide.

In 2022, a Bank of England review confirmed that more than 65% of UK-based banks and insurers relied on just four cloud service providers. 2024 will see the continued migration of infrastructure to cloud platforms but also an acceleration of third-party risk management policies covering cybersecurity, data protection, and operational resilience (including protecting customers from foreseeable harm as required by Consumer Duty). Linked to this material outsourcers should expect clients to be more demanding and the increased spectre of regulation.

We can add to these predictions at a sub-sector level:

Banking

In November 2023, the Bank of England announced that we should not expect to see the current base rate of 5.25% reduced for the foreseeable future. Reflecting the higher cost of borrowing, the volume of residential property transactions is forecast to fall significantly by 6¾% in 2024. Firms also face the narrowing of Net Interest Margins after a period of widening.

• Banks will fight harder to retain customers before their fixed deals end and to encourage new borrowing for energy improvements and home extensions.
• The larger banks and building societies are entering the trickiest phase of the Consumer Duty implementation – maintaining momentum and embedding in BAU whilst reducing the reliance on central programme resources. Every utterance and intervention by the FCA will trigger prioritisation within firms. Price & fair value, comprehension testing, and upheld complaints are likely to figure highly for the regulator and firms, especially when customers show signs of vulnerability.
• We expect a continuation of collaboration between banks and FinTechs and the acceleration of traditional banks acquiring FinTech’s. M&A activity will be driven by banks acquiring digital and innovation capability and the tougher funding environment will drive FinTech’s struggling for the elusive break point into traditional banks’ arms.
• Scale continues to matter in 2024 and we expect consolidation among the mid-size lenders and smaller building societies.

Insurance 

• Economic strains on households will prompt consumers to become increasingly price-sensitive, leading some to cancel policies to reduce monthly expenses. This trend coupled with the implementation of Consumer Duty requirements will compel insurers to reassess their business models and pricing strategies for both new and particularly existing customers. 
• The sub-sector will enter a transformative phase in 2024 where agility and the speed at which insurers can adapt to the frequency and severity of global risks will be a key differentiator in an already competitive market. So too will customer centricity with insurers looking to reward loyalty and lure new customers by personalisation. 
• Greater use of enhanced technology, for example using AI and real time data to tailor pricing and to predict and manage risk will also function as an enabler of transformation. 
• Attracting new people with the data and technology capability required for this digital transformation and retaining existing talent will be critical in 2024. 

Wealth Management 

• A new generation of investors are seeking more personalised advice and engagement to navigate product complexity. Firms will adopt hybrid operating models integrating self-service innovative digital tools with the option to collaborate with an adviser. The prize is to cut through complexity, enhance client experience and lower the cost to serve dropping the entry point for potential clients who fall below previous minimum investable asset thresholds.
• Intergenerational wealth transfer and changing investor priorities will increase demand for sustainable products. New SFDR regulation also imposes mandatory ESG disclosure obligations for asset managers with a view of improving investor confidence and reducing the risks of greenwashing. In response, asset managers will better define their ESG approach, including eradicating any perception of greenwashing, and bolster their capabilities to do so.
• The latest ‘Dear CEO’ letter addressed by the FCA to Wealth Managers and Stockbrokers highlights the regulator’s concerns relating to Consumer Duty and Financial Crime. We expect to see firms sharpen their focus in the run up to the next deadline of 31st July 2024 and especially as Boards will require to report on how they are evidencing compliance and protecting investors from foreseeable harm.

Fintech

• In 2024, funding remains a priority for FinTechs, as it serves as a catalyst for innovation and the development of solutions for emerging problems. The environment will remain challenging and as commented in the banking section that will force some businesses to consider exit options.
• Evolving B2B technologies will focus on banking infrastructure given the opportunity to deconstruct legacy processes and provide services that will be used by millions of consumers on a frequent basis. A growing opportunity is to supply the demand from FS firms to incorporate generative AI capabilities into their products and support the design of new FS products leveraging AI.
• Data privacy and security concerns remain a prominent concern for FinTechs to protect customers sensitive financial information stored or transmitted digitally.

Get in touch 

If you would like to discuss any of our predictions above, please don't hesitate to get in touch with myself, a member of our Financial Services team, or your usual Johnston Carmichael adviser. 

You can read further insights from our Financial Services team, here.