By Emma Rumney
LONDON (Reuters) - Britain's lead as the top European destination for international investment in financial services is starting to narrow as continental rivals vying for its business are boosted by Brexit, according to a report published on Monday.
The report, by accounting and consulting firm EY, found that the UK hosted just 14 more foreign investment projects in financial services last year than second-placed Germany, down from a gap of 67 in the previous year.
The number of projects in the UK fell 26 percent in 2017, compared to an increase of 64 percent in Germany, 123 percent in France and 13 percent across Europe as a whole.
Britain's EU neighbours have looked to capitalise on uncertainty over its future access to European markets to encourage financial firms to set up shop in their own countries, in a challenge to its long-established reputation as the European capital for the sector.
Omar Ali, EY's UK financial services leader, said Britain hung on to the top spot as factors like its talent, infrastructure and robust regulatory and legal systems were hard to replicate overseas.
"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 UK's future approach to the economy."
UK financial services attracted 78 foreign investment projects last year, down from a record 106 in 2016, EY said. Germany, in second place, won 64, while France saw 49, up from 39 and 22 respectively.
Ireland saw its number increase from 12 to 28, while Luxembourg attracted 17 projects compared to 2 in 2016.
For global financial firms that rely on Britain's membership of the EU to run their European operations, slow progress in Brexit negotiations has stoked fears that their access to the bloc could be restricted or even shut off altogether after March 2019, when Britain leaves.
This has prompted many to enact plans for a worst-case scenario, which usually involve shifting some of their British operations on to the continent to protect them even if Britain crashes out of the bloc with no deal.
Some banks, including Barclays
"The question is, will this be a temporary shift or the start of a more sustained trend?" Ali said.
A survey conducted by EY as part of the report found that two-thirds of global financial firms hadn't changed their investment plans following the Brexit vote, and 75 percent said they had no plans to relocate to the continent.
Retaining strong trading arrangements with the EU was cited by 39 percent of investors as key to ensuring the UK remains attractive in future, with 33 percent saying the same for trade deals with new countries and 31 percent highlighting incentives for foreign investors.
(Reporting by Emma Rumney; Editing by Jan Harvey)