The UK led Europe for FDI in financial services in 2016…
Global investors continue to put their faith in the UK financial services sector – investment in the UK last year was at a ten-year high. It’s easy to read too much into FDI numbers but they are a pretty good indicator of how confident business leaders are about the future prospects of different economies and sectors. In this light, the FDI numbers for UK Financial Services in 2016 were solid. Up 5% on 2015, the UK secured its highest level of foreign direct investment in financial services since 2006, retaining its title as Europe’s most attractive location for international investment.
London is still the leading European financial centre for inward investment, recording a total of 69 FDI projects this year – more than three times the number of projects in Paris and five times the number of projects in Frankfurt.
…and sentiment remains positive…
More than three-quarters of investors believe the UK’s attractiveness will not fall over the next three years and London is still seen as the most attractive city for investors.
That said, it looks like investors do have concerns about the UK leaving the EU and the uncertainty surrounding our future economic relationship with Europe. And investors’ asks are not limited to Brexit, they also think the UK would be more attractive if we reduced the level of corporate taxation and increased incentives for foreign investors. In short, we have work to do to maintain the pre-eminence of the UK as a global financial services leader.
London’s attractiveness has dropped since 2015, from 74% ranking it as a top investment destination to 62%. 52% of FS investors said that leaving the EU makes the UK less attractive. The loss of access to EU markets is a central concern for more than 40% of investors, as is the increase of tariffs on exports, and confidence in local labour skills has fallen.
…but the gap with other European financial centres is narrowing…
Europe’s other financial services centres are closing the gap on the UK. Whilst the number of FDI projects in the UK grew at 5% this year, Germany and France grew at a much faster pace, up 17% and 20% respectively.
The number of investors who rank Paris as a top investment destination grew from 39% in 2015 to 52% in 2017; Frankfurt grew from 24% to 44%; and Dublin was up from 4% to 17%.
This reflects what we’re seeing in the market. The UK remains the top destination but, as Brexit pushes them to create optionality in their business models, financial services Firms are definitely more open to considering other locations for parts of their business.
So far, no one particular location stands out as the clear alternative. Some Firms are moving parts of their business to Dublin, some to Luxembourg, and others are considering Paris, Frankfurt, Brussels and Amsterdam. Some newer centres in Europe show strong growth, such as Madrid and Berlin, but this is from a very low base.
…and action is required to help the UK maintain its leading position?
Investors consistently cite the UK’s quality of life, diversity, culture and language as the most attractive attributes of doing business here and the good news is, none of this is changing.
The appeal of the UK’s technology and telecommunication infrastructure has also increased in the past year. Part of this boost is due to the growing influence of the UK’s FinTech sector – 72% of investors believe it makes the UK more attractive as an FDI destination; 31% believe it makes the UK significantly more attractive. We need to defend these competitive advantages and build on them.
In addition, there are some practical steps we could take to make sure the UK remains as attractive as possible for global financial services. Investors are calling for us to reduce corporate taxation levels; negotiate trade deals with new countries; offer incentives for foreign investors and replicate the UK’s current trading arrangements with the European Union.
In the longer term, investor sentiment indicates that improving the skill levels of the UK workforce and ensuring access to the UK labour market for skilled foreign workers will be important.
An opportunity for the regions?
Currently, more than two thirds of investors still see London as the most attractive region in the UK to establish financial services operations. Outside of London the picture is mixed, Scotland and the South East vie for the second spot and other regions’ performances are inconsistent.
Building a stronger investment story for locations across the UK is in the interests of the whole industry and the wider economy. As Brexit and ringfencing prompt financial services firms to think about their structure, the UK’s regional hubs could be positioning themselves to compete. Investors are saying that to be more attractive the regions could improve access to talent and create a community of business partners and suppliers to attract investment. Now might be the perfect time to act on that.
It’s in the interests of the whole of the UK to get this right
The UK’s ecosystem and long-standing history as a centre for financial services has made the country a magnet for inward investment and created an incredibly strong platform from which to compete globally. However, sentiment has dropped since Brexit, and it’s clear that we have more to do to prove that the UK is committed to maintaining and building on that position of strength. This is important for the financial services industry, but it’s also really important for the wider economy.
Banking, insurance and wealth & asset management are the business sectors that investors believe will drive the country’s growth over the coming years. Nearly a quarter of all investors think they will be the main drivers of growth, well ahead of the second and third top growth drivers, IT (15%) and Business to Business services (12%) .
As the UK starts Brexit negotiations with the EU, the future of the FS sector must be a top priority given its legacy of performance and growth. It is too important for both the UK and European economy to be considered as anything less.