Briefing: Budget concerns loom for insurers as a positive Q4 looks under threat

By Jon Guy

UK insurers and the wider financial services sector are growing concerned over the contents of the upcoming budget amid fears that the government’s plans to fill its £22bn financial “black hole” will impact the ability for growth.

With a month before chancellor Rachel Reeves reveals the contents of the budget on 30 October, a new study has found that three-quarters of financial services leaders fear the budget will have at least a moderate impact on their business.

The KPMG authored UK Financial Services Sentiment Survey found that 28% of respondents expected the impact on their businesses would be significant.

The quarterly poll tracks business sentiment among over 150 leaders working in banking, insurance, asset and wealth management and private equity.

Almost a third of surveyed leaders (31%) said they were expecting the biggest impact of the budget to come in the form of sector-specific tax increases, such as bank surcharges.

And more than a quarter (26%) said they were expecting an impact on payroll costs, while 19% said the impact on talent from tax changes to non-doms would affect their business.

Lack of confidence

It seems confidence in the sector’s future under the new government has dipped over the last two months.

In the days after the election outcome, seven in 10 leaders surveyed in KPMG’s previous report said they felt more positive about the sector’s future under the new government – however, this has now dropped to 59% in the most recent iteration.

Looking at the risk to growth, 42% of leaders said they thought inflationary pressures would be the biggest business challenge over the coming quarter, followed by 39% who expect interest rates to present the biggest hurdle.

A further third of surveyed leaders are forecasting cost pressures as the biggest challenge in the next three months.

Geopolitical risks, pressure to improve environmental, social and governance (ESG) performance and keeping up with advances in technology were ranked by 25% of respondents as the biggest challenges.

The industry has its fair share of lobbyists and has been engaging with the Labour government for many months as the political currents began to sweep it into power.

Therefore, the air of growing concern over the political risk that the new administration poses to the financial services sector cannot be ignored.

Prime minister Kier Starmer used the election campaign to highlight the cost of motor insurance and pledged to engage with the industry on ways it could be reduced.

Therefore, it is unlikely the government would seek to take any steps that would see the cost burden increase here. However, for the City of London, there may well be bad news in terms of profits – especially for the highest earners.

The view has been that it is a case of wait and see – but that wait will soon be over.