The mood music in Brussels has changed over the last few weeks — and the financial services sector is back in the spotlight.
In recent negotiations, the EU explicitly challenged the notion that Britain will be able to “cherry-pick” the benefits of the Single Market and retain its strategic position in financial services post-Brexit.
With just over six months to go until the end of the transition period, pressure on negotiations is ramping up. Talks up to this point have not provided the necessary clarity on the level of cross-border access, equivalence, alignment or data adequacy that firms can expect post-Brexit, which is adding operational challenges to a finance sector already working hard to support the economy through the Covid-19 crisis.
Financial services have played a critical role in supporting businesses and individuals through the pandemic to date, and will be a key component of both the UK and EU’s economic recovery and future growth prospects. Both sides of the negotiating table recognise their strategic importance and are looking to safeguard their own industries within any deal.
But despite this tension, we should not overlook the longer-term fundamentals already in place across the UK’s financial services sector, which has shown remarkable resilience through four years of Brexit uncertainty, and now amid Covid-19.
The volume of foreign direct investment (FDI) projects entering the UK financial services market remains the highest in Europe. Throughout these uncertain Brexit years, and despite the flood of firms that have had to open or build out operations in the EU to be sure they will be able to service their customers post-Brexit, the UK has retained its position as the unfaltering FDI leader in Europe, and investor confidence is high.
Given the long-term time horizons of FDI investors, these investments represent a long-term commitment to the UK economy — and provide a bellwether for its prospects for recovery and growth.
The UK attracted 99 FDI projects in 2019 — the highest in Europe, and more than double Germany, which came in second with 43. If we cast our minds back to 2019, these projects were committed during a period of peak Brexit uncertainty, parliamentary suspensions, and public protest — a clear sign of strength of the UK financial services market.
In absolute terms, 2019 represented the third strongest year in the decade for the UK. The figures from the year before (2018) were the high point of the decade across Europe — and coincided with the peak of Brexit preparations as firms created a footprint in the UK and on the continent.
Questions around London’s status as one of the world’s leading financial hubs have been raised since the referendum. Yet the UK capital has remained the dominant European city for financial services FDI, recording 67 projects in 2019. While this was a 22 per cent reduction on the year before, it is 38 more (and more than double) that of Paris, which recorded the second highest volume.
For the time being, London is a clear outlier, with no one single European city emerging as a challenger.
And there is also good news on levelling up the economy. If we look at the UK picture for where FDI is creating the largest number of jobs, this isn’t all focused down south. Yes, London secured more than two thirds of all UK projects, but in terms of employment, the single project with the largest number of jobs was announced in Glasgow (estimated to be 2,700), which also received three times as many projects in 2019 as it did in 2018. We have also seen an uplift in projects in Leeds, Manchester and Birmingham.
In the last two decades of EY’s records on FDI, the UK has never lost its position as the financial services leader in Europe. Even now during lockdown and as we approach the end of the Brexit transition period, many investors believe the UK will actually grow in attractiveness over the next three years.
Beyond FDI, we know from our Financial Services Brexit Tracker that 45 global banks, insurers, asset managers, and fintech firms have reaffirmed their commitment to the UK since the referendum in 2016.
Of course, we should not be complacent, and it remains essential that the sector is protected in the negotiations. It is not by accident that the UK is a favoured market within Europe for financial services investors — this is the result of decades of work to build and strengthen the sector. Now is a critical moment in history for the government, regulators, and the industry to come together and ensure the UK retains its position as a world-leading centre for financial services.
Investors tell us that the things they value most are the breadth and depth of capital markets and the ability of governments and regulators to be well prepared for the next crisis. As the clock runs down on the transition period, they are thinking long-term about their strategic decisions.
The focus of negotiations on the future of financial services must remain on enabling economic recovery. This will deliver mutual benefits and ensure that both Europe and the UK remain competitive alternatives to non-European financial centres.
Main image credit: Getty