How has Brexit affected UK financial services?

Brexit has altered the way that UK financial firms are operating, particularly in their interactions with European partners. Since the referendum, British firms are exporting less but are investing more abroad, suggesting many have re-wired their strategies.

Since the vote to leave the European Union (EU) in 2016, UK financial firms have changed their strategies. They have exported less but increased outward foreign direct investment (OFDI), especially in Europe.

In a bid to stay competitive, 46% of greenfield projects and 69% of merger and acquisition (M&A) deals by UK financial firms went to the EU between 2016-2023. Greenfield projects involve establishing new operations abroad, while M&As involve buying or merging with foreign firms. Smaller and younger firms have led the way on greenfield projects, while larger firms have pursued acquisitions.

This strategic shift reflects a significant structural adaptation: as UK exports gradually lose competitiveness in the EU, firms are increasingly investing within the bloc to maintain their market presence.

Why does it matter that UK financial services exports are falling?

UK financial services firms have struggled to maintain their global edge since the Brexit referendum.

The share of financial services in total UK services export has now dropped down to closer to that of other EU countries. Indeed, its ‘revealed comparative advantage’ (or RCA – a measure of an item’s export value compared with total exports to other countries) fell sharply post-referendum, although it partially rebounded in 2021 (Figure 1).

Compared with other major EU countries such as France, Germany, Ireland, the Netherlands, and Spain, the UK is gradually losing its leading role – with the notable decline after 2016 causing the gap between the UK and the rest to narrow.

Figure 1: RCA of financial services in the UK and major EU countries

Source: Trade in Services dataset from the World Trade Organization (WTO), authors’ calculations.

Since the vote, the market share of UK financial services in major EU economies – like the Netherlands, Ireland, Spain and Italy – has fallen. For example, Figure 2 shows that the UK share in the Netherlands dropped from nearly 60% to below 50% after Brexit. This decline in major EU economies signals an erosion of the UK’s pre-2016 competitive edge.

The UK was the only major country to experience a decline in the export value of financial services when compared to both the EU as a whole and its leading member states (Figure 3). Whereas total UK service exports have recovered since 2016, financial services exports have continued a downward trend that started in 2012.

Figure 2. Market share of UK's financial services in major EU countries

Source: UN Comtrade

Figure 3. Export value of services sectors in the UK and major EU countries

Source: Trade in Services dataset from the World Trade Organization (WTO)

How are UK firms responding?

Against this backdrop of weakening export performance, UK financial services firms are substituting local presence for cross-border trade. The number of greenfield projects and mergers and acquisitions (M&A) deals conducted by UK firms steadily increased between 2016 and 2023, in contrast to the falling exports values (Figure 4).

This strategic shift allows UK firms to maintain market access, despite Brexit-related regulatory barriers and the loss of passporting rights under the EU-UK Trade and Cooperation Agreement.

Figure 4. Export value and total number of greenfield projects and M&A projects

Source: Trade in Services dataset from the World Trade Organization (WTO), fDi Markets, and Bureau van Dijk’s Zephyr

Where are firms investing?

The EU is the main destination for UK financial investment. As noted, between 2016 and 2023, 46% of greenfield projects and 69% of M&A deals were directed to the EU. France, Germany, Ireland and the Netherlands were the most popular targets. France surpassed Germany as the top destination for UK greenfield investments post-referendum (Figure 5).

The focus of OFDI on the EU reflects both historical ties and regulatory proximity. For many UK firms, Europe remains the largest nearby market with established supply chains, distribution partners, and a solid customer base.

Crucially, the EU and UK have long shared similar regulatory frameworks, particularly in areas such as product standards, labour laws, environmental regulations, and consumer protections. This regulatory alignment reduces the complexity and cost of compliance for UK firms operating in the EU, making it a more attractive destination for investment compared to non-EU markets with divergent regulatory systems.

By establishing or expanding operations within EU member states through greenfield investment, UK firms can preserve access to the single market and effectively sidestep many of the trade barriers that emerged after Brexit. These include non-tariff barriers such as customs declarations, rules of origin requirements, border checks, and increased administrative burdens.

Changes to VAT treatment and other indirect taxes at the UK-EU border have introduced further complexity and cost for cross-border trade. But investing directly in the EU allows UK firms to localise production and distribution, mitigating these frictions and maintaining smoother, more predictable access to European customers and markets.

More than 80% of UK greenfield investments in EU countries have originated from the South East of the UK after 2016, with London being the primary hub (Figure 6). The city also plays a similarly dominant role in the UK M&A deals in EU countries, accounting for the majority of deals.

Figure 5. Number of financial greenfield and M&A projects invested in by UK firms in EU countries, 2016-2023

Source: fDi Markets and Bureau van Dijk’s Zephyr

Figure 6. Share of greenfield and M&A projects by source region in the UK, post-referendum

Source: World Trade Organization (WTO) , fDi Markets, and Bureau van Dijk’s Zephyr

What does this mean for firms’ finances?

Firm-level data show mixed outcomes. As shown in Figure 7, UK firms that took on greenfield projects experienced a two-percentage point decline in their liquidity ratios (a company's ability to convert assets into cash) as new operations were financed. But they then recorded gains in core balance sheet measures: shareholder funds rose by around 28%, and net tangible assets increased by about 25% in the periods examined. Taken together, these patterns suggest that, on average, OFDI through greenfield projects is associated with stronger financial fundamentals for investing firms.

As shown in Figure 8, micro and medium-sized firms began to dominate OFDI through greenfield projects after 2016. This indicates that, following the referendum, firms of different sizes engaged in greenfield investment to varying extents, as a way to offset export reductions caused by Brexit.

Figure 7. Performance before and after greenfield investment, 2012-2023

Source: fDi Markets and Fame dataset, authors’ calculations
Notes: The pre-event average value is calculated based on the three years prior to the event, while the post-event average value is calculated based on the three years following the event, including the year in which the greenfield investment was conducted. All values have been ‘winsorised’ at the 5th and 95th percentiles to mitigate the impact of outliers. Only firms with at least one year of data both before and after the event are included in the calculation. Firms with entirely missing pre-event data or those that conducted greenfield investments in 2023 are excluded from the analysis.

Figure 8. Distribution by firm size: greenfield investments in the EU, 2012–2023

Source: fDi markets
Note: Firm size is categorised as follows: fewer than nine employees (micro firms), 10–49 employees (small firms), 50–249 employees (medium firms), and 250 or more employees (large firms).

What else do we need to know?

Several questions remain open. We need better micro-level surveys linking investment decisions to specific regulatory or market barriers, and longer time-series on affiliate sales to see whether foreign subsidiaries substitute or complement UK exports. Clearer evidence is also required on whether OFDI results in a net fiscal gain for the UK once tax bases and profit repatriation are considered.

More work on the experiences of small and medium-sized enterprises (SMEs) is crucial too, as smaller firms may face higher per-unit compliance costs and have limited capacity to establish foreign subsidiaries. Understanding their choices requires targeted surveys and matched administrative data.

Researchers are currently looking into how investment outside the EU is changing UK firms’ long-term competitiveness. Further studies could explore non-EU markets such as the United States, the Middle East, and Asia, as well as the effect of UK tax policies on OFDI decisions. Additional data on firm-level profitability, market access post-Brexit, and SMEs’ operational challenges will help refine policy recommendations and support targeted regulatory guidance.

Conclusion

Brexit has not ended the UK’s role in global finance. But it has changed how that role is exercised. Exports to the EU have declined, and UK firms have responded by building foreign operations and buying stakes in European firms. This substitution protects market access but shifts economic activity across borders.

For many UK firms, particularly large and financially resilient ones, OFDI has reinforced their position. But for SMEs, challenges remain. For the wider UK economy, these trends raise questions about lost export earnings, tax bases, and the long-term status of London as a global financial hub. Better micro-data and firm-level surveys will help policy-makers judge whether the post-Brexit increase in OFDI represents a success or a partial retreat.