Why FS FDI remains high in the UK, but investor sentiment plummets

Data from our latest UK Attractiveness Survey for Financial Services is initially confusing; the most FS projects in Europe once again, but the lowest levels of positive investor sentiment.

Our latest survey – which was taken during April and May 2019 – indicates a significant increase of pessimism among financial services investors. A record number, 48%, now believe the UK’s attractiveness will decrease over the next three years. This is an increase on 39% in 2018 and only 18% in 2017, and higher than levels immediately post-Referendum, 40%.

The UK’s FDI figures cannot be viewed in isolation; there has been a general uptick in activity across Europe as firms prepare for Brexit. The UK saw an increase in outbound financial services projects of 15%, taking the total to a decade high of 62 projects, with France and Germany holding the top recipient destinations for these projects respectively. This is unsurprising as firms established EU headquarters and distribution hubs in advance of the assumed 29 March 2019 deadline to safeguard their business.

If we look at the underlying factors driving investor sentiment beyond political uncertainty, there has been a drop across the key elements that are seen to make the UK attractive, from the quality of life, to education, technology, local labour skills and the stability of the social climate. What would make the UK more attractive? The investors we surveyed said that enhancing and improving the skill levels of the UK workforce is the top priority to ensure the country remains an attractive location for FDI and does not miss out on future growth opportunities. Having access to the right skills and talent was also voted as the top priority by investors to support the UK’s transformation to a digital economy, and it’s vital the government prioritises re-skilling, education and the future immigration system.

If we look at the detail of where FDI is landing in the UK, it’s clear there is also more work to be done to raise the profile of financial services centres outside of London, which remained the most popular destination for financial services investments in the UK last year, securing 77% of investments compared with 60% in 2017. The City continues to be a key destination for FinTechs due to its world-leading financial services and technology hubs, and we need to think about how this is replicated outside of London.

In the face of the challenges we encounter going into another six months of uncertainty surrounding Brexit and international trade, it could be easy for policy makers to overlook the drop in sentiment from financial services investors. However, the impact of any fall in financial services FDI will be felt across the whole economy. Despite the increased levels of investor pessimism, the financial services sector is still seen as the key growth driver for the UK economy – a third of UK investors and nearly half of financial services investors rank it the top sector that will drive the UK’s growth in coming years.  This poses some key questions; are these investment trends temporary, or are we starting to see more permanent changes? Time will tell, and it’s vital the government prioritises an orderly and business–friendly departure from the EU to give clarity on what the future landscape for financial services looks like, and to ensure the sector remains strong beyond Brexit.