We are often told that financial services is a boom sector and in many ways it is, employing over 1m people and bubbling with innovation and enterprise, but does all this activity mask the fact that in one key measure the sector is actually shrinking?

Our story we covered this week about the number of regulated firms falling should spark some discussion.

A look at the figures, produced by Autus Data Services who analysed the latest FCA data, throws up some interesting insights which, superficially at least, imply all is not well:

• Since January 2020 the number of firms regulated by the FCA has fallen by 5,500 or 7% to about 78,000

• In April alone 427 firms were de-authorised and there was a net declined in regulated firms of 149

• The number of directly authorised holistic Financial Planning businesses has declined by nearly 600 firms (9%) since 2020

Our story is a useful read with plenty of detail so do take a look.

All of this might imply the number of regulated firms is in rapid decline but the truth may be somewhat different.

Certainly the pandemic played a part. Some firms, perhaps smaller ones, called it a day and their owners simply retired. That’s one factor. A bigger one is consolidation.

I’m often sceptical when consolidation is cited too often as a driver of change but in the case of regulated firms there is no doubt that the wave of M&A activity has been, and continues to be, huge and is undoubtedly a major, if not the key factor, in driving consolidation and may be behind the drop in regulated firms.

On the more positive side, employment continues to be buoyant and there are signs that more people are working for larger businesses. The FCA data itself reveals an increase in the number of people employed in the sector.

The figures also show that there are plenty of new firms. In Greater London alone 59 new regulated firms were launched in April and throughout the UK 44 new investment advice firms were launched in the same month.

So regulation is not putting off the entrepreneurs but it is making would be business starters think more seriously about how they will cope with the growing level of regulation and red tape. For other firms, the benefits of working in larger enterprises are also becoming apparent as regulation and other factors, such as the cost of investing in technology, come into play.

One off bits of data are often not of great value but the trends here are apparent. The number of regulated firms is in decline, at least for now, and more people are working in bigger firms. M&A activity is likely to continue at its frenzied pace for some time.

Even so, there will always be room for the smaller advice firm and many are thriving but what they are offering may become increasingly different to the services offered by the bigger players.

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Kevin O'Donnell is editor of Financial Planning Today and has worked as a journalist and editor for over three decades.