Brexit Begins to Hit UK Financial Services as EU Counterparts See Big Gains: Study

Britain’s financial-services industry is suffering a drop in foreign investment while some of its European counterparts enjoy big gains, according to a new study that shows the starkest indication yet of Brexit’s impact on the sector.

Investment from abroad in Britain’s financial-services firms fell 26 percent last year, EY said in a report released Monday. During the same period, Germany experienced a 64 percent increase, while the figure for France more than doubled. London still attracted more inward investment in financial services than any other EU city, but the gap with Paris, Frankfurt and Dublin is narrowing, EY said.

With talks between the U.K. 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, as soon as possible. The resignation of U.K. Brexit Secretary David Davis late Sunday in protest over Prime Minister Theresa May’s plans for a soft exit from the EU only adds to the uncertainty over the direction of government policy.

“U.K.-headquartered financial services firms need to ensure post-Brexit access to EU markets to safeguard the future of their business,” Omar Ali, EY’s U.K. 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 U.K. 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.

Davis and junior Brexit Minister Steve Baker resigned two days after May revealed her plan to keep close ties to the EU after Britain leaves the trading bloc. The resignations have the potential to derail May’s government and set in motion a chain of events that could lead to an attempt to oust her as prime minister.

About 45 percent of the investors surveyed by EY said the potential loss of access to EU markets is one of their biggest concerns, while 33 percent cited lower levels of U.K. economic growth. Some 26 percent said diverging regulation was their chief issue. Despite these concerns, two-thirds of respondents haven’t changed their investment plans since the U.K. voted to leave the EU two years ago, and three-quarters have no plans to relocate staff.

“Despite all the challenges, the U.K. 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 U.K.’s future approach to the economy.”