Optimism among financial services firms about the overall business situation in the UK has dropped for the fourth consecutive quarter, which is the longest period of declining sentiment since the 2008 financial crunch and the sharpest fall since December 2008,  according to a survey by the Confederation of British Industry (CBI) and PwC.

Overall business volumes were found to be flat in the fourth quarter of 2016, but are anticipated to pick up in the first quarter of 2017.

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Ten percent of firms said that they were more optimistic about the overall business situation compared with three months ago, while 45% of firms said that they were less optimistic. However, 29% of firms said that they expect volumes to rise in the first quarter of 2017, while 22% expect volumes to decrease.

The sentiment was found to be especially pessimistic among banks, general insurers, and finance houses, though investment managers, life insurers and insurance brokers were found to be more optimistic than they had been three months ago.

When asked about the top challenge facing them in the current year, majority of the banks cited Brexit. Building societies however, considered macroeconomic uncertainty as the key challenge, while insurance sectors were concerned about level of competition.

PwC UK financial services leader Andrew Kail said: “Financial services companies face many challenges to their business models from competition, regulation, technology and Brexit and, as a consequence, are having to take some big decisions about their future strategy. 

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“While companies are relatively positive about short term business volumes and profitability, they continue to need to make significant investments to protect their future. The first quarter of 2017 and beyond  will see many start to fine tune and activate their Brexit contingency plans as the reality of life outside the single market and the EU begins to dawn.”

Meanwhile, the study revealed that financial services firms are expected to increase IT and marketing spending. Other capital investment, the firms said, would remain broadly unchanged.

Further, 18% of financial services firms said they had increased employment, while 10% said that it had dropped. The number of people employed is expected to record a more solid increase in 2017, with the exception of building societies.

CBI chief economist Rain Newton-Smith added: “Despite feeling uncertain about the near future, it’s encouraging to see the financial services sector charting a steady course, with firms expecting to raise investment and step up the pace of hiring, while continuing to deliver improvements to the bottom line.”