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UK Attractiveness for Financial Services Investors 2018

We now need decisive action to prevent Brexit uncertainty from damaging the UK’s status as Europe’s leading financial services hub

EY - Omar Ali

Omar Ali
Managing Partner
UK Financial Services

This is the first time since the referendum that foreign direct investment (FDI) data paints a proper picture of the impact of the vote for Brexit on UK attractiveness. The latest UK data, across all sectors, shows that the UK remains the top destination for FDI overall in 2017. However, it also highlights clear and growing risk of a future deterioration in UK attractiveness.

Closer analysis of the FDI data also highlights concerns for the sectors, like Financial Services (FS), that are most reliant on access to the EU markets. Whilst the UK still took the largest slice of FS investment, the number of inward investment projects in FS fell to 78 in 2017 from a record 106 in 2016. This represents a decline of 26%, during a year in which total European FS investment grew by 13%.

At a city level, London ceded territory to Paris and to other financial centres including Frankfurt, Dublin, Luxembourg and Munich.

Before we explore the drivers of that decline, it’s important to put this in context. In reality, an increase 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 shifting relatively small numbers of people and operations to alternative EU locations in response. The timeline for delivering these operational changes 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? The investor sentiment survey gives us a candid view of how investors are currently thinking about the UK.

The good news is the majority of investors still see the UK as an attractive destination for FS investment. But it’s clear that uncertainty over future access to the EU is already damaging UK’s attractiveness.

The UK is now seen as being less attractive for future investment than Germany. Looking ahead, those that expect the UK’s attractiveness for FS FDI to increase (25% of respondents) are outnumbered by those who foresee a decrease (37%).

Investors have said that future limits on skilled immigration would put the UK at an additional disadvantage during 2018 and beyond. If the UK is to avoid missing out on future growth opportunities, it is vital to ensure this short-term shift does not herald a lasting change to patterns of investment.

On the upside, the survey confirms that the UK’s FS ecosystem remains appealing to investors and there is no sign of a serious rival to London’s leadership emerging. In fact, fragmentation and decentralisation are becoming a growing theme of European FS investment. Even so, it would be complacent to view these results as anything other than a wake-up call.

After all, investors still see FS as the leading driver of future UK growth. It is therefore critical for the success of the UK economy as a whole that the Government prioritises FS, and protects and celebrates the industry’s role as a driver of innovation and growth.
That means looking beyond Brexit. Even if low-friction access to the EU’s FS markets remains the top priority for investors, it is equally important for Government policy to address other key priorities. The most pressing include attracting international talent, enhancing the skills of the UK workforce, strengthening the UK’s digital infrastructure, promoting investment in digital R&D, and striking trade deals with key markets - especially the US, China and India.

We are at a critical point in the evolution of the UK’s status as a global financial centre and what we do now will have a lasting impact. The whole UK economy is undergoing transition, and it’s not too late to influence the future shape of our FS sector. The survey holds a clear message for the UK government: taking the right policy decisions now will be crucial to supporting future growth and maintaining the UK’s long-standing position of global leadership.

Also see

EY - UK Attractiveness SurveyUK Attractiveness Survey
Our latest survey shows an economy in transition, influenced by Brexit and the force of technological change

 

EY - Inward investment after BrexitUK Attractiveness Survey: Inward investment after Brexit
Positive sentiment towards the UK hasn’t dramatically collapsed, but there are signs inbound flows are slowing, and the longer term outlook seems significantly more challenging

 

EY - Scotland Attractiveness Survey 2018Scotland Attractiveness Survey 2018
An unprecedented run of success for Scotland, with foreign direct investment setting new records in each of the past three years

 

EY - Europe Attractiveness Survey 2018Europe Attractiveness Survey 2018
Reveals a slowdown in the pace of FDI influenced by four powerful game changers remaking the European rulebook on cross-border investment