ACTIVITY in the UK financial services sector grew in the last three months at the fastest rate for almost three years, said a report.

But the increase was much lower than expected – and firms still considered levels of business to be well below normal.

The sector logged its fourth consecutive quarter of improving profitability – but the latest Financial Services Survey from the CBI and PricewaterhouseCoopers showed firms expect this to level off in the coming three months.

Companies said they remained concerned about the impact of regulation and legislation on future business – with a large proportion of firms expecting to spend more on compliance in the coming 12 months.

Some 38% of firms polled said business volumes rose during the second quarter of 2010, with 29% reporting a fall. The resulting balance of plus 9% is the most positive since September 2007 – but was far weaker than expected.

A balance of plus 63% expect a rise in business volumes, the most positive expectation since December 1993.

Banks were the only financial organisations to report a fall in business volumes during the quarter, while volumes for building societies and general insurers were largely flat.

Volumes grew for life insurers, finance houses and securities traders, investment managers and insurance brokers.

The value of income from fees, commissions and premiums rose at the fastest rate since March 2007.