While the UK has consistently led the rest of Europe in attracting overseas investment into Financial Services and has the continent’s most established Financial Services ecosystem, investor sentiment suggests FDI will slow for UK Financial Services over the next 12 months.

Last year investor sentiment firmly placed financial services as the driving force of UK growth, and the sector attracted 99 projects, equating to more than a quarter of Financial Services FDI in Europe.

However, the latest survey indicates that amid the pandemic investors are looking to prioritise investment in the digital economy, with the real estate industry – which is likely to have benefitted recently from the Government’s infrastructure ambitions – and the healthcare industry also rising in prominence, at least in the short term.

Investor sentiment on short-term investment plans into the UK has fallen over the course of this year, and the number of overseas companies planning to invest in the next 12 months has dropped to 25% from a ten-year high of 31% in April.

Within financial services, there has also been a fall, and only 10% of overseas firms are now planning to establish or expand their operations in the UK in the coming year. This is significantly down on the 45% cited in EY’s last survey carried out in April this year; and even marginally down on the 11% in 2019 when Brexit uncertainty was at its peak, heavily influencing sentiment.

A total of 20% of the financial services firms surveyed have said they’re now planning a substantial decrease in investment in the UK over the next 12 months due to COVID-19, with a further 28% planning a minor cut; 18% said they’re putting plans on hold for the time being. Positively, 23% of respondents have said they expect no change to their investment plans, and 10% say they plan to increase investment.

National lockdowns and the shift to mass remote working have meant the digital sector is now seen by global investors as likely to be the biggest driver of future UK growth. 66% of Financial Services firms surveyed believe this to be the case, up from 31% in 2019.

Ranked second is the real estate and construction sector with 30% of Financial Services respondents, up from 10% last year. And perhaps unsurprisingly amid a pandemic and the urgent work to create a vaccine, the healthcare sector has also increased in prominence for overseas investors, placing joint third with 28% of Financial Services respondents saying this sector will drive future UK growth, up from 10% in 2019.

The financial services industry, which was seen as the sector most likely to be a principle driver of growth last year, now occupies joint third place with healthcare in the list of key growth sectors, with 28% of Financial Services respondents expecting it to drive future UK growth, down from 46% in 2019.

The latest foreign direct investment (FDI) figures (2019 data) shows UK Financial Services entered the pandemic in a position of strength, attracting the most overseas investment for a single country, and leading the rest of Europe by a large margin. The UK recorded 99 projects in 2019 - more than double that of second placed Germany. Despite the short-term dip in sentiment in this latest survey, Financial Services investors believe the UK’s attractiveness over the next three-years will continue to improve.

Over half of financial services companies surveyed (53%) now expect the UK to be more attractive for FDI in three years’ time, which is up from 40% earlier in the year and 17% in 2019 when investor sentiment was at an all-time low due to Brexit and wider political uncertainty.

This is in line with broader financial services investor sentiment about markets across Europe (including the UK): 56% of Financial Services investors surveyed think markets across Europe will become more attractive for FDI.

Almost three-quarters (73%) of financial services respondents say the most important theme in their investment strategy is how city centre economies will change because of COVID-19.

The second most important theme, cited by 60% of financial services respondents, is the ability of the companies they invest in to use technology to transform their operations – likely to have risen in importance due to the shift to virtual working. The third theme (45%) is the extent of digital customer connectivity.

The most significant change in investor priorities since April is the decline in importance of the liquidity of capital markets and the availability of capital, which has dropped from 40% in April to 10% in the latest survey.

Sue Dawe, financial services managing Partner for EY Scotland, said: “It is perhaps not surprising that investors – across all sectors – are taking a very cautious approach to expansion or relocation while we remain in the middle of the pandemic. However, as talk of COVID-19 vaccines gather at pace, we can turn to the task of economic recovery with increasing optimism.

“Markets are fluid, competition remains global and the impact of COVID-19 will most likely alter the influencing factors that drive companies to choose where they build their business: Scotland has an extremely strong case to compete and be a top choice for relocation within the UK and at the global level.

“Highly skilled job opportunities and the relatively low cost of living contribute towards Scotland’s high quality of life. It is an important factor to help boost the talent pool and propel the industry forward, especially with many professionals evaluating their surroundings as a result of lockdown restrictions.

“Today’s report shows a strong digital economy remains an enduring priority for investors. Financial services will play an integral role post COVID-19 as Scotland and the UK seek to strategically rebuild the economy. We also have a real opportunity to champion the green industrial revolution that governments across the country now see as a priority agenda – especially as the eyes of the world turn to Scotland for COP26. Ensuring we have the depth of skills required for future growth will require on-going collaboration within the industry, cross-sector and in partnership with governments and regulators.”