EU rivals gaining on UK as top spot for investment in finance

A new study has suggested that uncertainty surrounding the Brexit process is making the UK less attractive as an investment destination. A third of global financial firms changed their plans regarding Britain after the referendum in 2016, while competitors France and Germany saw leaps in the number of foreign investment projects arriving in 2017.

A number of reports in recent months have reflected the varying degrees of optimism and antipathy directed towards the troubled Brexit process, as negotiations between Brussels and the UK enter their final phase in the coming months. One third of SMEs recently told OCO Consulting that they believe Brexit will have a positive business impact, while professional services firm Duff & Phelps Corporation polled financial sector leaders to find that the UK’s capital city had supplanted New York as the world’s financial hub, but warned that the approach of Brexit could soon change that. Meanwhile, A.T. Kearney found that while a weakened pound continues to make the UK a target for bargain hunters in 2018, the country faces considerable hurdles from Brexit’s impact on its economic outlook, something which could see overseas investment in Britain dry up in the post-EU wilderness.

Now, as debate continues to rage on as to the degree of Brexit’s impact on the UK economy – while the March 2019 deadline steadily approaches, and with it the possibility of a “cliff-edge” No Deal walk-away – a report from Big Four firm EY has found that the UK hosted just 14 more foreign investment projects in financial services last year than second-placed Germany, down from a gap of 67 in the previous year. In line with A.T. Kearney’s warnings then, Brexit anxieties seem to have had a major impact on levels of foreign investment in the UK already, with the number of projects in the UK falling 26% in 2017, compared to an increase of 64% in Germany, and a domineering 123% in France, while Europe as a whole saw growth of 13%.

UK financial services still attracted the most foreign investment projects last year, at 78, although this was a fall from its record 2016, which saw 106 such projects arrive on British shores. Meanwhile, the nation’s closest competitors look to have gained serious ground, with Germany, in second place, winning 64, and France seeing 49.

According to EY’s analysis, this shows that Britain’s EU neighbours have to some extent already capitalised on uncertainty over its future access to European markets, encouraging financial firms to set up shop in their own countries, in a challenge to its long-established reputation as the European capital for the sector. So far, one of the most successful of these seems surprisingly to have been Ireland, which could see Dublin become a key financial hub in the future – though this is still distant at present. Subsequently, Ireland saw foreign investment projects there boom from 12 to 28.

For global financial firms that rely on Britain’s membership of the EU to run European operations, the continued slow progress in Brexit negotiations – along with International Trade Secretary Liam Fox’s shock suggestion that the Government should favour a No Deal Brexit over compromising with its former trading partner – has stoked fears that access to the bloc could be restricted or even shut off altogether after March 2019. As a result, many entities have commenced the enacting of plans for a worst-case scenario, a “No Regrets” policy which usually involves the shifting some of their British operations on to the continent to insulate their operations if Britain crashes out of the bloc without a deal. The Bank of England anticipates that this trend could eventually see some 75,000 financial services jobs exit the UK.

More optimistically, alongside the current state of play in terms of EU investment, EY’s survey also found that two-thirds of global financial firms hadn’t changed their investment plans following the Brexit vote, while three quarters said they had no plans to relocate to the continent. However, retaining strong trading arrangements with the EU was cited by 39% of investors as key to ensuring the UK remains attractive in future, with 33% suggesting the same for trade deals with new countries and 31% highlighting incentives for foreign investors.

Speaking on the shift of investment, Omar Ali, EY’s UK financial services leader said, “The question is, will this be a temporary shift or the start of a more sustained trend?” He added that while Britain had hung on to the top spot as an investment destination in Europe, thanks to factors like its talent, infrastructure and robust regulatory and legal systems, the nation can only rely on these factors for so long before an inability to trade overseas impacts.

Ali concluded, “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.”