The UK financial services sector matters - and has major challenges on its hands
The financial services sector employs just over 3% of the UK workforce but it contributes close to 9% of the country’s Gross Domestic Product – nearly £210bn per annum. What happens to it matters.
In relative terms, the sector is now smaller proportionally than before the pre-2008 financial crash - although it has seen a slow recovery since the immediate aftermath of that period.
Nonetheless, it remains a huge contributor to the UK’s prosperity. As such, it is one meriting a closer look in terms of the challenges it faces.
The sector faces a complex array of challenges - regulatory pressures, technological disruption, talent dynamics, and shifting market expectations.
Of course, more than many sectors, it is exposed to global economic turbulence, uncertainty and related risks. Inflation, interest rate volatility, and the weakness of the UK economy disrupting potential investment. This is complicated by ongoing geopolitical tensions – whether that be controversy over investment in or positions on Palestine / Israel, or sanctions that complicate global investments and operations (e.g., the Ukraine war and the impact on many Russian-linked activity both in Moscow and in London). And this is all before you count the fun coming out of Washington DC now and for the next 4 years.
But what are the sector-specific challenges facing financial services businesses? I spent time reviewing these and summarise them below.
1. Regulatory compliance and complexity
Rapidly evolving regulations (e.g., ESG reporting mandates, anti-money laundering laws, GDPR) require constant adaptation. This is made more complex for those with cross-border operations who face conflicting rules (e.g., EU’s DORA vs. U.S. SEC cybersecurity guidelines).
All of this costs money – and the UK’s Labour Chancellor, Rachel Reeves, has argued recently that some of this regulation has gone too far. Compliance costs now consume ~10–15% of operational budgets at major banks (Deloitte, 2023). UK Finance states that the total cost of compliance for the UK banks is just over a staggering £38bn. And the penalties for non-compliance are stiff – for example, Goldman Sachs’ had to hand over $2.9B 2020 in settlement for the 1MDB scandal.
2. Digital transformation and technological disruption
The sector is awash with legacy systems that are creaking under the weight of usage with ageing IT infrastructure (e.g., COBOL-based systems in banks) hindering integration with competition from more modern solutions.
This is compounded by Fintech competition such as the ‘Neobanks’ (e.g., Revolut, Chime) and decentralized finance (DeFi) platforms, both of which have the potential to erode traditional revenue streams.
And then there is the AI ‘monster’. This does provide opportunities if adoption and implementation are successful. AI-driven fraud detection and personalized wealth management could be of huge commercial value – both in terms of managing down-side risk and improving client relationships.
However, as with all sectors, AI adoption poses challenges. There are the ethical risks (e.g., algorithmic bias) and, of course, the significant costs of implementation. It will not come cheap to adapt, adopt and leverage AI solutions in a safe way for banks and other financial services businesses. JPMorgan’s $15B annual tech budget underscores the sector’s scramble to modernize.
3. Talent management and skills shortages
If you talked to any of the big financial services leadership teams, you will know they are all focused on trying to attract or retain the most talented tech people. Demand for data scientists, cybersecurity experts, and blockchain developers is huge and, certainly in the UK, it outpaces supply. For example, 70% of financial firms report difficulty hiring AI/ML specialists (PwC, 2023) and 40% of existing roles in the sector require reskilling for digital tools (World Economic Forum, 2023).
There is also now the perennial issue of hybrid working.
Goldman Sachs’ CEO David Solomon may believe (and vocally decry) home working as an "aberration" but the majority of employees in the sector disagree. He and other sector CEO’s do not believe and do not want home working to be a "new normal". Many such leaders believe that innovation and collaboration is best supported by in-person interactions.
But the workforce, especially in the UK, want to retain a level of home or hybrid working that came as a boon post-Pandemic. As such, the sector faces hiring and retention challenges as employees seek flexibility, clashing with traditional office-centred cultures.
4. Cybersecurity threats and operational resilience
In March, UK MPs reported that banks have lost a total of 33 days to outages. Most outages last between 1-2 hours and 3-6 hours. And this challenge is only increasing as the number of attacks continues to rise. Financial institutions are prime targets, with ransomware attacks up significantly since 2020 (IBM Security). The costs are large. The average cost of a breach in finance is now just shy of £5M (IBM Cost of Data Breach Report, 2024).
Sector businesses need to have operations that can weather systemic shocks such as pandemics, cyberattacks, and climate events. You don’t need to look to fiction for doomsday scenarios (though Netflix’s recent Robert De Niro flick, Zero Day, is a bloody good yarn). Reality is scary enough. Just look at the 2023 SWIFT hack, which exposed vulnerabilities in global payment networks, to see the impact that poor systematic preparedness can have. All of these will test the resilience of continuity plans. It’s why the EU’s Digital Operational Resilience Act has mandated stress-testing IT systems by the end of this year for all relevant institutions operating within its borders.
5. Customer expectations and trust
Traditional relationships between banks, insurers, investment houses and their customers are changing – and changing fast. There is a tangible ‘digital-first’ demand, with 87% of customers now using mobile banking (Finder, 2025), pressuring firms to innovate and continue improving their digital offers. This is now added to by the desire for growing service personalization.
With the ‘death’ of the traditional branch or financial manager, customers are left with generic, often faceless relationships with their financial providers. While AI-driven tools like chatbots have a role to play in mimicking some of the interactivity that previous human services offered, they will need to be balanced against actual human relationships – ones that research has shown builds brand loyalty and trust.
And, of course, trust remains a lingering issue, with post-2008 crisis scepticism and recent scandals (e.g. the Credit Suisse collapse) dampening positivity about the sector – even as it invests billions in the economy.
6. Cultural and organizational change
With all of these challenges, UK financial institutions are having to look in the mirror and assess whether they are ‘match fit’. Most, if not all, are undertaking change of some kind or another. Some are trying to be more agile, facing into nimbler fintech competitors.
This ‘agility transformation’ is pitting traditional hierarchies against fast-paced innovation cycles. It is being led by newer sector players who can zip around and more quickly adapt to changing market demand.
This is also posing a challenge to leadership mindsets among the traditional sector players. The need to balance risk management (or in some cases risk-aversion) with disruptive thinking and related innovation is a major tension playing out in board rooms, and at every level of larger, established banks, insurers and other sector players.
And it is compounded by a desire to open up the sector, making it less male, less white and more diverse.
Even with the anti-DEI diatribes being thrown at the sector in the US, UK boards can leverage their position by acting as ‘inclusivity’ disrupters. Women hold only just over a third of C-suite roles in the sector. UK financial services institutions can tap into the diversity of thinking that comes from having more diverse leadership teams – and the innovation that has been proven to come with it.
The sector needs to navigate a labyrinth of regulatory, technological, and societal shifts.
Success will hinge on balancing innovation with risk management, seeking and keeping the best talent, and rebuilding trust across its consumer base (and among legislators).
Institutions that prioritize agility, tech adoption, and employee upskilling will be the ones best positioned to thrive despite or even as a result of the global turbulence of the coming years.
I really enjoyed reading this, thank you for sharing it. I’ve just spent the day this week with 3,500 women in data science and AI, and so much of what you raise here, particularly around talent, leadership, and cultural transformation, mirrored our conversations.
I was oversubscribed in my talks with incredibly smart women, ambitious, hungry, wanting to advance knowledge, solutions and discover new insights and solutions, as much as furthering their careers. Changemaker that want to do meaningful socially responsible work.
I spoke about the challenges of ethical and moral decision making in leadership - especially when we look at AI. The research that tells us women are NOT any more risk averse than men. And my own thesis that arguably we’ve had to spend a lifetime making more risk based decision so are probably more equipped for the task.
Sadly there research in risk decision making is even biased in design!
You’re absolutely right to point out the pressure on financial services to attract and retain top tech talent and to diversify leadership. But I have to say: I do think the talent is already here. The question is whether organisations are truly creating the conditions for that talent to thrive.
Have you yet written anything on that you can point me to? If you have I’d love to read it.
The distinction between technical upskilling and leadership development. It’s one thing to teach people new digital tools, but it’s another entirely to ask: who are we promoting, why, and what does that say about our culture? Too often, organisations accelerate a narrow kind of leadership because their internal systems reward what’s familiar, not necessarily what’s courageous or innovative. All the things we know from data aswell about performance in women and potential in men. (Caroline Criado-Perez & Mary-Ann Seighart)
That’s exactly why, when organisations ask me to support them in developing courageous leadership, I always say: start with your data. What are your behaviours, systems, and culture telling you? Are you genuinely creating an environment where diverse thinking and smart risk-taking can thrive?
And that’s also why it’s so important to have organisations like Karian & Box involved, to help shape and make sense of that internal data, to surface insights that may be hard to see from the inside, and to support organisations in building the cultural conditions where courageous leadership isn’t the exception, but the norm?