LONDON: Britain’s financial-services industry is battling a drop in foreign investment while some of its European counterparts enjoy big gains, according to a new study that displays the starkest indication yet of Brexit’s impact on the sector.
Investment in Britain’s financial-services firms from abroad fell 26% last year, EY said in a report released Monday. During the same period, Germany experienced a 64% increase, while the figure for France more than doubled. London remains the most attractive EU city for investment in financial services, but the gap with Paris, Frankfurt and Dublin is narrowing, EY said.
With talks between the UK and EU stalled since March, banks are rushing to establish new trading hubs elsewhere in the region. EU regulators have made it clear they expect banks to establish full-scale, standalone operations inside the trading bloc staffed by significant numbers of both front- and back-office staff, as well as senior employees, as soon as possible.
“UK-headquartered financial services firms need to ensure post-Brexit access to EU markets to safeguard the future of their business,” Omar Ali, EY’s UK financial-services leader, said in the report. “The question is, will this be a temporary shift or the start of a more sustained trend?”
The UK financial sector attracted 78 FDI projects last year. That’s the highest number in Europe, but down from a record 106 in 2016, EY said in the report. Germany’s total increased to 64 projects in 2017 from 39 the previous year, while France registered 49 new projects, up from 22 in 2016. Luxembourg saw 17 projects, surging from just 2.
About 45% of the investors surveyed by EY said the potential loss of access to EU markets is one of their biggest concerns, while 33% cited lower levels of UK economic growth. Some 26% said diverging regulation was their chief issue. Despite these concerns, two-thirds of respondents haven’t changed their investment plans since the UK voted to leave the EU two years ago, and three-quarters have no plans to relocate staff.
“Despite all the challenges, the UK is still the most attractive market for FDI in Europe,” Ali said. “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.”