The UK continues to be Europe’s most attractive location for international investment into financial services, however, it is losing ground to other EU destinations.
The UK registered 78 financial services foreign direct investment (FDI) projects in 2017, down from the record 106 projects the previous year, while financial services investment into Europe as a whole increased by 13%, according to EY’s 2018 UK Attractiveness Report. Investor sentiment for the longer term outlook of the UK financial services industry remains largely mixed, with 37% thinking the UK’s attractiveness will decline over the next three years as uncertainty over Brexit shows little sign of abating.
Omar Ali, EY’s UK Financial Services Leader, comments: “It would be easy to use 2017 FS investment numbers to predict the end of the UK’s global dominance in financial services, but the figures just don’t show that. Despite all the challenges, the UK is still the most attractive market for FDI in Europe. This is due to several factors, many of which are difficult for any other centre in Europe to replicate – our talent, quality of life, time zone, tech infrastructure and robust regulatory and legal systems. But we can’t ignore the drop in investment and forward-looking sentiment – investors are sending a clear message that answers are needed on future trading arrangements, access to skills and the UK’s future approach to the economy.”
UK holds onto lead but challengers are knocking at the door
The UK has hung onto its number one spot with 78 FDI projects in 2017, however, the gap has narrowed markedly. Germany, in second place, attracted 64 projects (up from 39 the previous year) and France, in third place, registered 49 projects (up from 22 on 2016). There have also been big gains for Ireland, recording 28 projects, up from 12 in 216 – a 133% increase, and Luxemburg, attracting 17 projects, up from 2 the previous year – a 750% rise.
Omar Ali continues: “In reality, a shift in investment from the UK to other EU countries was always to be expected. Many UK-headquartered FS firms need to ensure post-Brexit access to EU markets to safeguard the future of their business, and are currently moving relatively small numbers of people and operations to alternative EU locations in response. The timeline for delivering these operational restructures is tight, and we will see this trend play out up until March 2019. The question is, will this be a temporary shift or the start of a more sustained trend?”
Investor sentiment on UK attractiveness and ongoing concerns
Financial services investors have said a number of key factors make the UK attractive including: quality of life, diversity, culture and language (94%); education (88%); technology, telecommunication infrastructure (83%); local labour skills (83%); the stability of the social climate (75%) and access to the European market (75%).
Many investors, however, do have concerns about the future prospects for the UK. They cite loss of access to EU markets (45%), lower levels of UK economic growth (33%), diverging regulation (26%), restrictions on labour mobility (23%), tariffs on imports (23%), and tariffs on exports (20%) as their biggest concerns.
That being said, two-thirds (66%) of global financial services investors aren’t changing their investment plans following the UK’s vote to leave the EU and three-quarters (75%) have no plans to relocate operations from the UK to Europe. 15% said they have plans to establish or extend operations in the UK over the next year.
As for ensuring the UK remains attractive in the future, retaining strong trade arrangements with the EU (39%) is seen as key, as is negotiating trade deals with new countries (33%), offering incentives for foreign investors (31%), ensuring access to the UK labour market for skilled foreign workers (25%) and reducing the regulatory burden on business (25%).
Cities: London preserves its lead but Paris, Frankfurt and Dublin are closing in fast
London retains the crown when it comes to attracting the highest level of inward investment for financial services, recording 47 projects over the past year. However, this is down on the 73 projects recorded in 2016, and other European cities are closing in on London’s lead as companies ensure they have the required registered and regulated operations in the EU to do business on Day One of Brexit. Paris attracted 26 projects in 2017 (up from 17 in 2016), Frankfurt recorded 25 projects (more than doubling its 12 projects in 2016) and Dublin has registered 23 projects (a 130% increase on the 10 projects it recorded the previous year). Munich similarly has seen a significant increase – attracting 21 projects, up from 6 in 2016.
In terms of the UK as a whole, London is by far the most attractive destination for financial services investment into the UK, though its popularity has waned slightly. It received 60% of UK financial services projects in 2017, down from 69% in 2016. In joint second place are Scotland and the North West, although these also showed declining project numbers. However, Scotland secured two of the largest investments (recording over 200 jobs each) from Australia and the US.
As for sentiment going forwards, 66% of investors see London as the most attractive region in the UK to establish financial services operations, followed by the South East of England with 13%.
US and China leading sources of FDI
The largest source of financial services investment in 2017 was again from the US, accounting for 28% of all UK financial services FDI (jumping from 22% in 2016). China and Switzerland are joint second with 10% each. This is the fourth year in a row that China has taken second place, but in 2017 its share reduced year on year from 15% to 10%. The Netherlands, India, Canada and Brazil also became leading origins for financial services FDI projects, albeit generating smaller numbers of projects.
Sales and marketing operations remain key investment focus
The largest number of projects – 68 – were for sales and marketing type activities (accounting for 87% of all projects in 2017). Headquarter projects in the financial services sector were down on 2016 (from 16 to 5 projects in 2017).
UK employment generated by financial services projects fell back 17% in 2017 to 2,362 compared to 2,861 in 2016. And the UK’s share of employment through financial services FDI across Europe as a whole dropped from 37% in 2016 to 16% in 2017, the lowest share in the decade, reflecting the overall drop in FDI projects in the UK.
Despite drop in FDI, financial services sectors still seen as the key drivers of UK growth
Despite the dip in financial services FDI, the banking, insurance, and wealth and asset management sectors are still perceived by investors to be key drivers of growth for the UK as a whole. 39% of overall investors and 52% of financial services investors believe these sectors will be the main growth engines for the UK over the coming years (considerably up on last year’s respective 24% and 35% figures).
Omar Ali concludes: “The UK remains the top country in Europe for financial services investment, with London far outstripping its continental cousins as the most attractive city. It is clear that investors are concerned over the outcome of the Brexit negotiations, which means it is increasingly important that the UK Government does all it can to ensure a future deal includes Financial Services.”