Business volumes in financial services were up in the three months to June fueling optimism in the industry, despite an unexpected fall in profitability, according to a survey by the Confederation of British Industry (CBI) and PwC.
The research, which questioned 98 firms, showed business volumes have risen across many industry sub-sectors - with the exception of finance houses and parts of the insurance industry - but overall profitability has fallen unexpectedly after six quarters of robust rises.
This is down to diminishing pricing power rising costs in many sub-sectors, the firms said.
The research found 37% of financial services firms said they felt more optimistic about the overall business situation compared with three months ago, while 9% said they were less optimistic.
Almost half (48%) of firms said business volumes were up, while 15% said they were down.
The survey also suggested employment across the sector was scaled back.
But it gave a positive outlook for the next quarter, with 44% of financial services firms expecting business volumes to grow at a solid pace, profitability to rebound, and numbers employed to increase slightly.
Areas of focus for firms will include making improvements to sales & distribution and customer relationship management, the survey found.
At the same time firms expect the "increased regulatory burden" and failure to meet demand due to "inadequate systems" to limit their business over the next year.
CBI director for competitive markets Matthew Fell said: "Despite a surprise fall in profitability, financial services firms are upbeat about their prospects, with business volumes rising across most sectors.
"But the sector is still facing a number of significant challenges. The adverse impact of regulation on business expansion has crept up the agenda and concerns about the ability of firms' business systems to cope with new demand has risen to its highest level in thirteen years."
The CBI said its survey found 19% of financial services firms have increased employment, while 32% said it decreased. Firms expect employment to increase by about 5% next quarter.
A separate survey by specialist recruiter Robert Walters out on Monday found more than half of employers in the financial services sector are looking to increase permanent headcount.
Asked about their recruitment plans for the second half of 2014, 51% of financial services employers say they are looking to make permanent hires and while 53% will be concentrating on mid-level hires, it said.
Financial services recruitment director Peter Milne said: "Permanent hiring activity is a good barometer of confidence, so this news bodes well for financial services professionals who may be looking for their next role.
"Activity is increasing across the market, with demand especially strong for experienced executives and mid-level staff."
