Scotland and UK financial services industry holding the line on investments but future looks uncertain, says EY

One year on from the referendum on EU membership, the UK financial services industry has retained its title as Europe’s most attractive location for international investment and Scotland remains in the top three destinations in the UK, according to EY’s latest study of Financial Services’ Attractiveness, but this may not remain the case, the global giant says.

EY figures show Scotland secured eight financial services FDI projects in 2016, an increase of one from 2015 which placed Scotland third in the UK for financial services inward investment behind London and the North West with 69 and nine projects respectively.

Both Glasgow and Edinburgh were ranked in the UK top ten for securing financial services FDI projects.

Glasgow held on to fifth place after London, Manchester, Birmingham and Belfast, while Edinburgh dropped from third to sixth. Glasgow also proved its continued attractiveness with foreign investors as it recorded the fourth biggest project in terms of job creation for the sector in the UK.

Sue Dawe, EY’s head of Financial Services in Scotland, said: “Scotland’s financial services industry has had a robust performance in terms of inward investment in 2016 but there are clear signals that Scotland cannot be complacent.”

While the number of financial services FDI projects in Scotland increased from seven in 2015 to eight in 2016, the North West of England managed to achieve greater growth in the same time period from five projects to nine.

Ms Dawe continued: “The North West of England had a particularly strong year in terms of inward investment and managed to narrowly edge ahead of Scotland to rank as second most attractive destination for financial services FDI. While this does not predict any long term trajectory of Scotland’s ability to attract foreign investment it does show that other areas of the UK are able to compete and we need to intensify efforts to maintain Scotland’s market share.”

However, EY noted that investor sentiment is becoming more mixed on the longer term outlook for UK Financial Services, due to concerns over the impact of Brexit on the future attractiveness of the UK.

Ms Dawe said it was “imperative that Scotland and the wider UK works to maintain its perceived attractiveness to foreign investors, especially now as Brexit negotiations begin to take shape”.

The UK financial services industry attracted 99 foreign direct investment (FDI) projects in 2016, the highest level since 2006 - an increase of 5 per cent on the previous year. Scotland secured eight projects in 2016, an increase of one year-on-year.

While the UK has hung onto its number one spot by a sizeable margin, the gap is starting to narrow. Germany, in second place, recorded 39 financial services projects (up 18 per cent year on year) and France, in third place, registered 25 projects (up 25 per cent on 2015).

The key factors stated by financial services investors on what makes the UK attractive include: quality of life, diversity, culture and language (83 per cent); technology, telecommunication infrastructure (83 per cent); the UK’s domestic market (69 per cent) and transport and logistics infrastructure (67 per cent). 72 per cent of financial services investors also believe the FinTech sector makes the UK more attractive as an FDI destination, with 31 per cent thinking it makes it significantly more attractive.

But, investors’ confidence in local UK labour skills and access to talent, the stability of the social climate and the transparency of political, legal and regulatory environment have all declined over the last 12 months. Significant concerns also remain about the UK leaving the European Union. The key concerns for financial services investors are loss of access to EU markets (42 per cent), tariffs on exports (39 per cent), and tariffs on imports (15 per cent).

Omar Ali, EY’s UK financial services leader, said: “Despite the referendum on membership of the EU, UK financial services continued to attract record levels of investment last year. However, the outlook for 2017 and 2018 isn’t so certain. We can see from our study that investors have concerns about what Brexit may mean for the future and they want greater clarity on corporate taxation and incentives for foreign investors.

“That the attractiveness of the UK financial services sector has not yet fallen is testament to the strength of the UK’s unique financial ecosystem. We have to be realistic though, our study of investor sentiment is showing they are concerned about the outcome of Brexit negotiations and their confidence will have been shaken further by recent political events. It’s vital that the Government does all it can to articulate a clear strategy around skills, market access and future trading arrangements to ensure the UK continues to be Europe’s preeminent financial centre for many years to come.”

There are a number of areas global investors have stated would make the UK more attractive including reducing corporate taxation levels (33 per cent), negotiating trade deals with new countries (26 per cent), offering incentives for foreign investors (26 per cent), retaining the UK’s current trading arrangements with the European Union (25 per cent), ensuring access to the UK labour market for skilled foreign workers (22 per cent) and reducing the regulatory burden on business (17 per cent).

Meanwhile, London retained its crown as the European Capital of inward investment for Financial Services, recording 69 projects over the past year. This compared to Paris which recorded 19 over the year and Frankfurt which recorded 12. Indeed, London has registered more than three times the number of projects as Paris over the last decade (465: 140).

Whilst London remains the top choice for investors, the level of attractiveness has dropped from 74 per cent in 2015 to 62 per cent in 2017. The gap is beginning to narrow with other European financial capitals. Paris has climbed from 39 per cent in 2015 to 52 per cent this year and Frankfurt from 24 per cent to 44 per cent.

As for how London compares with the rest of the UK – 69 per cent of investors see London as the most attractive region in the UK to establish financial services operations. This is followed by the South East with 7 per cent.

North West England has fallen from 7 per cent post-referendum to 2 per cent this year while Scotland has fallen from 6 per cent to 2 per cent in the same time frame.

The largest source of financial services FDI in 2016 was from the US, accounting for 1 in 3 (33 per cent) of all UK financial services FDI. The second largest – for the third year in a row – was China (albeit with a slightly reduced share, from 11 per cent to 9 per cent).