A Confederation of British Industry survey of 85 financial services firms during the first two weeks of June reveals activity in the sector fell at its fastest pace since December 2023, marking the first contraction in over a year.
Banks led the downturn, with output dropping sharply and further slowdown expected in the coming months.
Headcount in the sector declined over the quarter and is forecast to fall even faster next quarter, as firms seek to reduce costs and shore up modest profit improvements.
Meanwhile, planned investment in land, buildings, vehicles, plant and machinery is set to ease over the year ahead.
Weaker demand was the most cited reason for cutting spending, alongside economic volatility, regulatory pressures and tax measures announced in the autumn budget.
Optimism among financial services businesses sank to its lowest level in nearly three years, weighed down by US tariffs, global trade uncertainty and conflict in the Middle East.
The CBI’s deputy chief economist, Alpesh Paleja, said conditions had “deteriorated” and firms are now looking ahead to the Chancellor’s Mansion House speech and the autumn budget for reassurance on future tax burdens.
“Given the Employment Rights Bill also poses further pressure on firms, it’s critical that government give financial services the clarity and confidence needed to achieve its growth mission,” he added.