Sentiment among financial services firms fell at its quickest pace since September 2019 as businesses worry about the impact of the cost-of-living crisis, according to a new survey.

Firms reported declining optimism, with fears over low demand for services and poor returns on investment, which is limiting spending in the sector on recruitment and expansion, the latest CBI/PwC Financial Services Survey found.

Labour shortages were also cited as a cause for concern, although these appear to have improved significantly from the end of last year.

While business volumes and profitability held up against the headwinds buffeting the economy, global inflationary pressures and increased geopolitical uncertainty stemming from war in Ukraine have started to take a toll on business confidence

Business volumes have continued to grow in the three months to March, respondents said, but at a slower pace than the final three months of 2021.

Bosses also said they expect volumes to be flat in the next quarter.

As a result of the uncertainty, companies said they were looking to continue investment in IT but expected to cut back capital expenditures on land, buildings, vehicles, plants and machinery.

Building operational resilience emerged as a key theme throughout the survey, with 92% citing this as the key priority for future business strategy and transformation plans.

Firms separately identified “responding to new cyber threats” and “improving detection of cyber breaches” as the main priorities to improve cyber resilience and reduce tech risk.

Rain Newton-Smith, chief economist at the CBI, said: “While business volumes and profitability held up against the headwinds buffeting the economy, global inflationary pressures and increased geopolitical uncertainty stemming from war in Ukraine have started to take a toll on business confidence.

“With operational resilience becoming an ever more important priority for the sector, there is danger that a ‘wait and see’ approach may dampen growth prospects for the wider economy.

“A lack of preparedness for mainstream use of digital currencies and challenges in developing net zero plans suggest a need for swifter policy development in both areas to guide and stimulate industry-wide action.”

Isabelle Jenkins, head of financial services at PwC UK, added: “Financial services organisations are right to be careful and cautious as their resilience is once again put to the test.

“As the cost-of-living crisis mounts for households, it’s likely that we may see an increase in non-performing loans, another challenge financial services firms will have to respond to to ensure consumers are supported through this difficult time.

“Despite some investment plans reined in for now, this is not the time to batten down the hatches completely, rather firms should continue to look at how they can best use the insight they are gathering to respond quickly and decisively in changing market conditions.”