FIRMS operating in the UK's financial services sector have reported the fastest growth in business volumes since 2007 in the three months to September.

Robust income rises and a sharp fall in the value of non-performing loans mean profits bounced back after contracting in the previous quarter - in spite of a spike in costs. The value of non-performing loans fell at the fastest rate since 1996.

However optimism growth across the sector slowed to its lowest levels in two years after hitting record highs at the end of 2013.

The assessment of the UK's financial services sector comes in the 100th CBI/PwC survey, which canvassed the views of 109 firms between August 18 and September 4.

It signalled the rise in profits and volumes will continue to grow at a comparable rate into the next quarter, as firms expect sales to come from new customers in the next three months.

Allan McGrath at PwC in Scotland said: "As we reach a significant milestone in our survey work with the CBI, it is encouraging to see an increasingly optimistic industry, particularly with regards to growing volumes and revenues.

"Firms appear to be much better equipped to cope with what has been an unrelenting regulatory and compliance agenda, although the twin demands of Solvency II and the increasing FCA focus remains a concern."

The survey suggests 60 per cent of businesses reported a rise in volumes over the last quarter. With 11 per cent stating that workload was down, it gave a net balance of 49 per cent - the strongest reading since 2007 (51 per cent). Looking ahead, 63 per cent said they expect volumes to increase in the next three months. With 8 per cent saying volumes will fall, it signals a net balance of 55 per cent - the strongest expectation of growth since June 2010 (63 per cent).

While profitability bounced back in the last quarter, income from fees, commissions or premiums fell - the 27 per cent fall was the steepest since March 2009 (-53 per cent).

Meanwhile, financial services firms began hiring again in the last quarter following an unexpected fall in headcount the previous quarter, though activity is expected to stabilise in the next quarter.

Based on long-term trends, the survey suggests employment in finance and insurance will stand at slightly above 1.152 million by the end of 2014, 28 per cent higher than the year before.

On investment, the picture was found to be mixed over the past quarter. While more spending by firms on marketing and information technology is planned for the year ahead, investment in vehicles, plant and machinery is due to be scaled back.

CBI director of economics Rain Newton-Smith said: "The UK's financial services sector is enjoying its strongest run of growth since 2007, with activity rising across all categories of customer and profitability bouncing back.

"The spike in costs was offset by a steep fall in the value of non-performing loans, suggesting that much of the fall-out from the financial crisis is now working its way out of the system."