Brexit uncertainty is “biting hard” on banks and investment managers with optimism in the financial services sector falling sharply in the quarter to September.

According to the latest CBI/PwC Financial Services Survey of 100 firms, business optimism in the financial services sector fell further, having declined in all but one quarter since the start of 2016.

The survey also reported fears from financial services employers that shortages of skilled staff were constraining growth and recruitment was becoming harder.

The deterioration of sentiment in banking and investment management was widespread with only finance houses reporting an improvement in optimism.

Overall business volumes increased slightly in the three months to September, although the level of business dipped slightly below normal.

While many sectors saw business volumes rise – notably insurers – banking volumes were stable for a second successive quarter and investment managers said volumes contracted, confirming a “striking loss of momentum” during 2018.

Firms surveyed said income from fees, commissions and premiums was largely unchanged (+1%), but income is expected to fall in the quarter ahead (-13%)

Looking ahead to the next three months, overall business volumes are expected to be unchanged, marking the weakest growth expectations since 2009, said the CBI/PwC survey.

Overall headcount is expected to remain stable in the three months to December, with cuts expected in banking and investment management.

Two fifths of firms said they had found it more difficult to recruit and retain workers over the past year and half of firms said skill shortages could constrain business expansion in the year ahead – the highest share since the start of the survey in 1989.

Rain Newton-Smith, CBI chief economist, said: “While it’s good to see that demand for financial services is holding up, with business volumes edging higher last quarter, it’s simply impossible to ignore the dangerous signs of strain on the sector arising from the combined challenges of a subdued economy, Brexit, regulation and rapid advances in technology.

“For the sector to continue to be one of the UK’s most attractive economic assets, it is fundamental that a Withdrawal Agreement with the EU is agreed.”