Series 6 Episode 9: A vision for the future: delivering growth in the age of transformation

Transcript

Tessa Norman: Welcome to this episode of Risk and Regulation Rundown. Today I'm really excited to be joined by two brilliant guests, Miles Celic, CEO of The CityUK, the industry body of the UK based financial and related professional services, and Darren Ketteringham, PwC UK's Financial Services leader. In today's episode we're going to be reflecting on the future of financial services. We're going to be talking about themes from our Vision 2025 report which The CityUK and PwC published back in 2017, and which sets out a vision for a transformed world leading financial and related professional services industry in 2025. Now that we're a month into 2025, and with the government on the cusp of setting out it's future strategy for the industry, now feels like the right time to revisit some of the themes from that paper, reflect on progress made, and look at what more needs to be done to set up the industry to thrive amid the transformative changes that we're expecting to see over the coming years.

Miles, I'll come to you first if that's alright, and let me start by congratulating you on your OBE in the New Years Honours list, fantastic news. I think it would be helpful just to remind our listeners of that vision that we set out back in 2017 and to give a bit of a context of what the world looked like then, it was a year of course after the Brexit vote, it was also a year after the FCA's Sandbox programme, and interestingly the government at at the time was consulting on an additional strategy. A few parallels there, do you want to start us off by outlining what that report really set out and why you think it's still relevant now?

Miles Celic: It was a little bit back to the future, wasn't it? The report at the time was really an opportunity to set out the future vision for the industry. As you say, we were at a time of Brexit, we'd just seen, to the Back to the Future point, we'd just seen Donald Trump get elected in the United States, it was a time of regulatory change, political change, and the report really was a chance to set out a roadmap for where the industry needed to get to, financial and professional services as an ecosystem, as a cluster, as a massive national asset, national strategic asset for the UK, and we wanted to look at what's the direction that it needs to go in, what are the major political, geopolitical, economic, regulatory trends, and the PwC team that worked on this, and I was looking at the report ahead of this - it absolutely stands the test of time, and it has been a bible for us at TheCityUK, it's absolutely informed all the work that we've done since then, it's been the foundation for that work, and interestingly if you look at the way that the government is approaching the industry now and the economy now, it absolutely embeds itself and a lot of the themes that come out of the report. So the sense of partnership between government, industry and the regulators, the trade pieces I think stand up particularly well, the role of tech, the role of sustainability, and the role of the industry as a national asset. London is an enormously important showcase to the rest of the world, but I remember at the time the chairman of TheCityUK, John MacFarlane, the chairman of Barclays made the point that regions will be winners, and that comes out in the report, and it's come out in everything that we've seen since then, and I was really proud to be a part of it, and it is an award winning report. We had a terrific ceremony that we went to where this won an award for thought leadership, and that's absolutely stood the test of time.

Tessa: Brilliant, well, it's fantastic to see, as you say, so many of those themes being so resonant today, let's start with that point that you made about that partnership between government, industry and regulators. I think that feels so resonant in this current moment that we're in. What are your reflections on the direction of travel that the government has set for the industry so far?

Miles: We think it's very positive that of the eight industry strategies that the government has set out, two of them are financial services and professional services. It's a reflection of where the UK's strengths as an economy are, we are the most successful net exporter of financial services in the world, when you add services into it more generally, it's put us as the second most successful exporter of services on the planet after only the United States. It's clearly the direction of travel that the advanced economies are going in. It's really positive to see the government look at that in that sense, it's really interesting as well that the government looks at the industry not just as a place where economic growth can be delivered within the industry itself, but as an enabler of growth in other parts of the economy, of investment into things such as green finance, into regeneration across the UK, and into the deepening of trade links and trade corridors with other parts of the world, which also brings with it a sense of soft power as well. This is a massive national asset, we have argued off the back of recommendation number one in the report from 2017 onwards that there needed to be a partnership approach between government, industry and the regulators, it's really positive to see this government take that forward.

Tessa: Brilliant, and Darren, what are your reflections on that direction from government we've seen so far? Particularly in terms of how is industry feeling at the moment and what are you hearing from your clients?

Darren Ketteringham: Yes, the government's plan for financial services which was published pre-election, gave an important degree of clarity to the sector, and there was a lot of continuity which was very helpful. Now with the Mansion House announcements and the call for evidence, a clearer picture is emerging of the government's ambitions, and a slightly different approach to the previous government. The conversation about risk on rather than risk off, which is emerging, as well as doubling down on the growth and competitiveness agenda, feels like a real positive change and a call for action, and it's going in the right direction. The government is open to bold ideas to support it's mission to stimulate economic growth, that creates a unique opportunity for the industry at a time when the pace of change is driving the need for significant transformation. Our financial services clients are actively thinking about their future business and investment strategies, and it's important they do so in a way that aligns with the government’s plan to unlock growth in the economy, and there's some really good news here. As noted in the recently released PwC global CEO survey, at which FS CEOs globally were significant contributors to. The UK surpassed Germany, China and India to become the second most important destination for investment after the US, this is significant, that's the first time the UK has secured this spot in the 28 year history of the survey.

The same CEO survey found that 98% of UK CEOs expect to make material changes to their business and operating model this year, and their motivations are driven of course in part by the pursuit of growth due to improved confidence in the economic outlook, indeed 61% of UK CEOs anticipate economic growth in the next twelve months, up from 39% last year which is significant, and 66% of UK CEOs are developing new business capabilities or operating models in pursuit of that growth. That's really positive, the growth potential, of course, for FS is huge. If we go back to 2022, financial services contributed £171 billion to UK Real Growth Added Value, and PwC's recent framework for growth report found that if the UK was to match the performance of leading OECD economies across various components of growth, whether that be skills, digital transformation, infrastructure, then the growth in the FS sector could add up to around £38 billion and that's equivalent to 20% more in GVA in the next ten years.

Tessa: I think that optimism among industry and that growth potential is really important, and so tells a really positive story at the moment, and I think those points you made as well about potential for transformation and business model change are important, and we'll come back to those as well. Before we come back to some of those themes, lets dive into the really crucial themes of the report. Darren, what are the areas that stand out to you as being particularly relevant now, and thinking about where we've seen progress and where there's perhaps more to do?

Darren: Yes. I thought I'd talk about two of those areas, particularly technology and skills. Lets start with technology. There's clearly been lots of progress, and technology and innovation have been driving significant change for a long time in financial services. A number of the trends, for example, changing customer preferences, the transformative potential of cloud enabled digitisation and AI, has meant FS firms are really embracing technology to remain relevant to their customers and their clients, to be cost effective and be differentiated in the marketplace. If you look back to 2017, we're now talking about different technologies of course, cloud computing, GenAI, they're really transforming the way firms interact with each other, with their colleagues, with their customers and their clients. The emerging technologies, such as distributed ledger technology and quantum computing, will also continue to challenge the costly and complex legacy IT estates that FS are challenged with, but also improve operational efficiency, decision making, and also customer experience. Everyone is talking about GenAI at the moment, aren't they? So, why don't we just double click on that for a moment, because the expectations for GenAI remain really high in industry, and believe it or not, UK CEOs are ahead on GenAI adoption. 93% of UK CEOs have adopted GenAI to some extent versus only 83% globally, but UK CEOs are behind in seeing this translate to greater revenues or profits. Whereas 49% of CEOs globally expect GenAI to increase profitability in the next twelve months, only 36% of UK CEOs have the same confidence, and I think that might be based on the experience so far.

Only 14% of UK business leaders have seen profitability improvements from GenAI over the last year, compared to 34% of CEOs globally. So that might explain a little bit there. And when we turn to our clients, there's three areas where we're seeing them invest in it, in GenAI at the moment. Number 1 is around fraud detection and prevention, number 2, around credit scoring and, number 3, around algorithmic trading, however, FS firms are still struggling to be AI ready, and what do I mean by that? I mean, the data needs to be clean, it needs to be standardised, it needs to be accessible, and it needs to be secure if they're going to take advantage of the AI capabilities. It's crucial for FS firms to have the right data infrastructure and governance in place to maximise the GenAI opportunity, and then linked to technology, I think is a critical importance of up-skilling the workforce to meet future needs, and maintaining the UK's ability to attract global talent. In the Vision 2025 report, we anticipated a growth in the demand for digital, cyber, and data skills, which was correct and remains relevant today, of course. Recent research by the Financial Services Skills Commission shows that FS has the second largest skills gap in the economy, and we know that skills and talent are top priorities for leaders, this remains an issue but a great opportunity for the sector.

As I mentioned a few minutes ago, 98% of business leaders are anticipating material changes for their business model to stay competitive, and so workforce investment obviously continues to be absolutely critical, our latest survey found that 52% of UK CEOs are up-skilling their people, 62% are recruiting for new skills, and we know that skills is the greatest perceived to emerging to technology adoption. Aligned to the emphasis on growth appetite we've been discussing, the stat I mentioned earlier being two thirds of CEOs are focusing on developing new business capabilities or operating models to address either new markets or create new offerings, I think is really telling.

Tessa: Yes, those connections between those two themes are really crucial, and as you say we hear so much about GenAI. It's really interesting to hear some of those real life experiences that firms are experiencing on the ground, and another area from the report that stood out to me in which I think there's some other links there to the points you've already mentioned around technology, is customer centricity. What's your take on how far the industry has come on that?

Darren: If we go back to the Vision 2025 report, it highlighted quite relatively low levels of public trust in financial services, and predicted industry would become much more highly customer centric. The same time public trust was about 41% according to the Edelman Trust Barometer, and haven't really recovered, I don't think, from the hit it took from the financial crisis. Since then COVID obviously brought a bit more purpose to financial services, and regulatory initiatives such as consumer duty have raised the bar on customer centricity. As a result trust has improved. The latest Edelman Barometer shows public trust rose to 49%, that's up 8% over a number of years in 2024. Whilst, yes, that's an improvement, I still think we've got a long way to go, and customer expectations of course continue to evolve, in part due to the demand for fast, frictionless and personalised experiences they are becoming accustomed to in other sectors. So FS needs to keep pace. Progress has been made, but there's more to do. In the report we said that decisions such as onboarding, credit scoring, insurance pay outs will be much more immediate, and not all that has come to pass, but I think that's still what the industry needs to aim for. The FCA recently indicated it could accelerate progress in this space. For example, by requiring firms to accept electronic verification of death to speed up bereavement in claims and insurance.

Tessa: So, you've covered there, brilliantly for us, Darren, technologies, skills, and customer centricity. Miles, are there further themes from the report that really stand out for you?

Miles: Yes, there's several, but one of the key ones, and one of the things that will really shape the direction of the industry, is going to be geopolitical risk and geopolitical change. We do look at that in the report, but that has accelerated, it was very difficult to predict thing such as the invasion of Ukraine, and some of the populist political pressures that have arisen. I think the question there is one of regulatory fragmentation, and, certainly at the time the report was written off the back of Brexit, that was in itself something that contributed to regulatory fragmentation, that's neither a positive nor a negative, it's just a reflection of the outcomes that grow from that. But we are an industry and we are a country that depends on open, free markets, and benefits from lower levels of regulatory burdens, and regulatory barriers. I think that's going to be interesting in terms of how that walks through and develops over time, I think Darren very compellingly has set out the technological impacts. What's going to happen in terms of quantum, I think is going to be really interesting, GenAI is really interesting, and think how that plays out.

There's a huge amount around talent, as Darren's rightly pointed out, we've got to continue to be able to attract the best and the brightest to the industry both from the domestic talent pool, but also from international talent pools, and again, the report I thought looked really compellingly and really interestingly at the challenge of continuing to attract people to the UK post Brexit, and some of the recommendations talked about the need for speedy, easy and frictionless approaches on talents, and visas, and so on, and government's taken forward quite a lot of that. But it continues to be a challenge in terms of the final area which is around regulation, that I'd raise. We have seen regulatory innovation, you pointed out at the start, Tessa, that the report was released right after the sandbox had gone live, but I think we're now into an era where regulators are not just there to support growth, which this government clearly wants them to do, but also they're going to be need speedy, they're going to need to be innovative, they're going to need to be against other regulatory jurisdictions. I think there's a huge amount here that can be taken forward on the foundation that the report sets out, that the government is taking forward a great deal of it. The next ten years is going to be really exciting.

Tessa: Absolutely. So, as you've articulated, Miles, I think of course that innovation and transformation agenda is going to be really front of mind for our clients as they're looking further ahead. Darren, thinking about the next few years and the next decade, what that holds for the sector, how do you see some of that transformation agenda aligning with changes that you expect to see and customer needs and preferences over the next decade?

Darren: We talked a bit about the progress on customer centricity, haven't we, but I think the next phase we're going to see is going to be a lot around enhanced use of data, analytics and technology to create what I call a hyper-personalised offerings and experience. I think the governments and FCA's drive to improve financial inclusion and consumer resilience will also drive change, I think we talked in the Vision 2025 strategy about the importance of addressing societal needs such as savings and the advice gap, and also the ageing population. A lot of those gaps and challenges we're still talking about that today, aren't we? The ONS forecast by 2072 suggests that 27% of the UK population could be 65 and over, and that's up from over 19% today. It's important we start to address some of those challenges right now. I think financial services will continue to become even more digitised, reflecting changes in customer preferences and expectations. I think one of the challenges for the industry is to meet the demands of an increasingly multi generational society which is both changing workforce and customer expectations, and I think intergenerational wealth transfer, it still remains a big systemic issue to tackle, and at the same time it's a big opportunity for the FS industry to work together to solve.

Tessa: Absolutely, I think there's quite a lot of opportunity created by those changes, particularly around the potential for new products and services, we've got the ongoing advice guidance review. I think there's a lot of opportunity there for firms. If we continue with that theme of looking further ahead, I don't think we can talk about the future without reflecting on climate and the transition to net zero. Miles, what's your view on how you see that impacting the industry going forward?

Miles: I think this is one of those areas where the industry can play a really important role in meeting a major socioeconomic national and international challenge, and you can absolutely see that in the way that successive governments have approached the industry, and I think that looks particularly strong in terms of the approach from this government. One of the points that we've always raised is if you look at the gap that's required, and multiple surveys have shown this and multiple studies have shown this. The gap that's required to get the planet to net zero is multiple trillions per year we are falling short by, and that can't be filled by the private sector alone, and it can't be filled by the public sector alone, particularly at a time where a lot of countries are in constrained fiscal circumstances. This requires a partnership again, and again, that's one of the themes that keeps coming out in the report, it requires a partnership between government, between industry and between regulators, in order to unlock the finance that exists, and the opportunities that they will need to fill to help meet the net zero challenge, and that's going to require an innovative approach on things like blended finance and on first loss, and so on, and we think is really interesting that if you look at the National Wealth Fund that's been set up. That clearly seems to be very much at the heart of thinking there, how does the public sector and the private sector work together to unlock these investable opportunities that provide the ability to help us deal with the challenges of climate change and the move towards net zero, and I think this is not just about transition. The challenge is going to be as we move towards adaptation as well.

Tessa: We've got that huge challenge there and that transition to net zero, we've got the technological transformation which you've both spoken to, and then of course, against that backdrop of changing demographics, macroeconomic and geopolitical uncertainty. I think bringing all of that together, that brings a lot of challenge for industry and a lot of opportunity, but for industry to be able to thrive in that changing and transformative environment. Miles, what are your thoughts on what you would like to see from both government and regulators?

Miles: I think this is the key point here. We've got to have a supportive, not just regulatory and supervisory framework, it's got to be about the tone from the top, and it's really encouraging to see what we've seen from the Chancellor in her Mansion House speech, and recent other comments about the need to regulate for growth rather than to regulate for risk. I think that requires us as a country and as a society to back the regulators, to recognise there does need to be a shift in the dial on the approach to risk, that obviously means that things will, from time to time, go wrong, companies will fail. But, the flip side of that is that's the process of creative destruction, and if you do that correctly and you do that in a safe way and a responsible way, that drives innovation, and that also means that we need to be in a really competitive place on technology, on talent, on tax, and that's not just about the headline rate of tax. Again, the report makes clear, I think again, very persuasively that this is about having a streamlined, predictable, stable tax regime, and one that is simplified.

Again, that's going to be really important, there is a cost to businesses as PwC knows very well from the advice that it gives to clients. There is a cost to businesses from overly complex, overly burdensome tax regimes on top of a high tax regime and, again, PwC has done some fantastic work on identifying the fact that the UK banking tax levels are uncompetitive compared to the UK's major competitors. We need to see progress in that area, and as I've talked about before, it's continuing access to global talent, and it's also about making sure that we recognise that cities like Edinburgh, Manchester, and Birmingham are national assets as well as London, and making sure that we think about the UK industry and the UK ecosystem as a collective whole.

Tessa: Absolutely. Darren, would you agree with those points that Miles has set out, and is there anything further that you'd add that perhaps you or your clients would like to see from government and regulators?

Darren: Yes, I absolutely agree with Miles' comments there, I think they're very well made, and a regulation, of course, will be key. If we take the reoccurring theme of technology, I think it's vital the UK's regulatory framework keeps pace with innovation, such as AI, digital assets and tokenisation, because that's got to be there to support the sectors ability to capitalise on these advancements, and there are a number of steps of course the government and regulators could take to support that innovation without compromising stability and consumer protection. We've heard quite a bit from the government lately, haven't we? For example, assessing where the regulatory framework may be unnecessarily inhibiting innovation, exploring ways to make the rule books more accessible to new businesses for their start up phase, and also things like relaxing the mortgage rules to allow people to buy houses with smaller deposits, and encourage more home ownership, which I know the FCA is taking a look at right now.

Tessa: Absolutely, and I think that plays to your point, Miles, about the consequences of taking a bit more risk, or allowing a bit more risk into the system. We do need to have a collective recognition of the potential consequences of that, and I think we're continuing to see that debate play out in terms of growth and competitiveness versus consumer protection and financial stability. If we reflect on some of those changes that we might see in the policy and regulatory agenda as well as all the other drivers of change that you've both highlighted. Darren, what's your view and what does all of that mean for firms in terms of their strategies, their business models, and how they pursue opportunity?

Darren: Given the drivers of change we've talked about on this podcast, it's perhaps unsurprising in some ways that in our recent global CEO survey found that 34% of UK CEOs thought their businesses would not be economically viable within ten years on its current path. That's quite a big statistic. It's up from 21% last year. As I said, it's a sobering statistic, but I think what it reinforces is really the need for significant transformation in the financial services industry. Lets look at retail banking as just one example. Retail banks, I guess, are very broad in terms of their offerings, their segments, they serve and products they provide, and they're broad in terms of the role they play in the value chain as well to fulfil that offering. Banking remains one of the most vertically integrated industries, in contrast many other industries even the most regulated such as Pharma, have been forced to focus both in terms of their offering and also their role, specific role in that value chain. We've seen challenges in the retail sector, of course, around the department store offering where they try to be all things to all people, and we've seen that's incredibly challenging, and the retail sector has been responding to that over a number of years, and I expect to see that challenge continue to arise in the retail banking sector. Will that conglomerate model really continue to exist into the future? Will they be disintermediated to provide different value along the value chain.

I guess, having a look at it from our clients perspective, they're really focusing on the opportunities arising from using more data analytics AI, and technology to, as I said before, hyper-personalise their products. I think also to enhance efficiencies and productivity, and speed up processes, and importantly improve customer journeys. But there are of course challenges, and again, we've discussed many of those, our CEO survey found that GenAI is not yet really creating top line growth for companies, and they're still building the data foundations, the skill, the culture, and the capabilities that really need to take advantage of that, and of course, the drive for growth needs to be balanced, doesn't it, against regulators expectations for firms to both proactively identify and mitigate risks in increasingly complex and dynamic environments. That includes risk of course associating with emerging technologies. I think that point was reiterated really strongly in the PRA's recent supervisory priority letters to FS firms.

Tessa: Yes, absolutely. I think it's important that we don't lose sight of that in this debate around a stronger focus on growth, of course, the importance of effective governance and risk management is going to remain absolutely critical to the regulator, and as you said, in a way all of this change does of course bring risks as well, new technologies, the geopolitical risk that we've spoken about. So needs to remain a focus on that. Miles, I'll come to you for any final closing remarks, is there anything you'd add to what Darren's articulated there?

Miles: No, I think Darren's set out really compellingly what the current challenges and opportunities are. I think the survey is a really important marker, I think there's a lot of positivity there, I think particularly in the sense that the UK has moved to second place, that's a really good news story. But, obviously there continues to be challenges, and we can't be complacent on these things, we've got to continue to grow, innovate, and build the centre here in the UK. I think the challenge now is for industry to lean in, we finally got what we've wanted which is a clear strategic approach, the industry now needs to lean in and support that, we need to make sure that government works consistently and cohesively on the industry strategy, on the trade strategy, on the FCA strategic review, all of which will be forthcoming in the next few weeks and months, and industry needs to play its part in that. I think there's a challenge here to make sure that the state capacity to support the growth of the industry is there, we've called for this for years, we've called for it since July 2017, when the report was launched, now is our time to step up to it.

Tessa: Brilliant, thank you, well, I think that's a fantastic message for us to end on, and thank you both so much for joining us. It’s been a really interesting conversation and great to look back at our predictions and how they've aged over the last few years, and to really reflect on what feels like quite a unique point in time, and quite a unique opportunity with government looking to the industry to play a crucial role in delivering it's economic growth agenda, and as we see that agenda continue to evolve over the coming weeks and months, as you've said, Miles. I think all of those themes that we've talked about today, technology, skills, customer centricity, sustainability, and the international connectivity as well. I think they're going to be just as crucial over the next few years as they were at the time of the report, and I'm sure we'll be returning to many of those themes in future podcast episodes. To our listeners, I really hope you've enjoyed this conversation as much as I have, and thank you as ever for listening. Please subscribe to future episodes, and please rate and review this series as it helps other listeners to find us. If you'd like to hear more from us on risk and regulation, look out for our regular publications which we'll link to in the show notes, and I look forward to speaking with you again in our next episode.