TheCityUK response to the Parliamentary Business and Trade Committee: Financing the real economy inquiry

We very much welcome the Committee’s focus on this topic and the opportunity to respond. TheCityUK is the industry-led body representing UK-based financial and related professional services. We champion and support the success of the ecosystem, and thereby our members, promoting policies in the UK and internationally that drive competitiveness, support job creation and enable long-term economic growth. The industry contributes over 12% of the UK’s total economic output and employs almost 2.5 million people – with two-thirds of these jobs outside London across the country’s regions and nations. It pays more corporation tax than any other sector and is the largest net exporting industry. The industry plays a vital role in enabling the transition to net zero and driving economic growth across the wider economy through its provision of capital, investment, professional advice and insurance. It also makes a real difference to people in their daily lives, helping them save for the future, buy a home, invest in a business and manage risk.

Executive Summary

This submission does not attempt to cover the waterfront of what is a huge and complex subject. Rather, we provide some data which confirms the premise that the UK has been historically underinvested, with negative economic consequences, and we focus on three priority areas – scale-up companies, real assets (i.e. commercial and residential property and infrastructure), and defence – and provide some international comparators.

Our role as a membership organisation is to represent the suppliers of capital. Our submission primarily focuses on the providers, rather than the users, of capital. While many of the debates about regulation, risk appetite and public equity markets have been very well-rehearsed, we offer a few supplementary points which are at the forefront of members’ concerns. A deeper read on some of these is available through the reports referenced in the text. Finally, we turn to users of capital and offer some suggestions on better use of technology and open banking for the SME sector.

The issue of ‘productive’ or purposive finance that benefits the wider economy is important to our members. Finance and the broader economy have a symbiotic relationship – each drives the other, positively or negatively. Without finance, there is no investment in growth, job-creating or exporting businesses, or our built environment, and our public safety and services become unfundable.

Your enquiry is therefore very important, and we hope this submission is helpful.

Is British investment too low—and why? 

The UK faces a serious competitiveness, productivity and growth challenge, significantly exacerbated by very low investment over recent decades. The UK’s investment to GDP ratio sits at around 17% to 18%. This is well below other G7 countries, which have investment rates in the 20% to 25% range. As of 2024, the UK has had the lowest level of investment in the G7 for twenty-four of the last 30 years.

The Capital Markets of Tomorrow report[1], produced by CMIT in 2024, quantified the scale of additional investment required by the UK economy at £100bn per annum for the next decade e.g. £20 to £30bn for housing, £50bn for energy and £8bn for water. Arithmetically, the report suggested that investment on this scale would support a 3% economic growth rate.

There are several identifiable causes which differ from sector to sector. An important caveat is that not all companies want to grow – they may be resistant either to diluting equity or taking on debt to invest. The following comments relate most specifically to two real economy areas where the investment shortfall is most pronounced and where the growth effects of increased investment would be felt most readily: scale-up or growth companies and real assets (including infrastructure, regeneration, commercial and residential property). We also discuss defence below, given its strategic importance.

We highlight the following points:

For scale-up companies, the UK has a very longstanding issue (the ‘Macmillan Gap’ was first identified in 1931). Accessing pools of equity capital requires significant policy and regulatory changes to UK capital markets to encourage the growth of a vibrant mid-cap market. This includes changes to our pensions system and measures to encourage retail investment. Some of these changes have been announced in the Pension Investment Review, the Mansion House agreements and the Leeds Reforms, which have been welcomed by the financial services industry, but are still some way off being implemented.

For real assets, the government has correctly identified the challenge of planning approvals and has recognised the importance of professionalising the way investable projects are identified and presented to investors. This Committee was instrumental in the process which led to the establishment of the Strategic Investment Opportunities Unit in the Office for Investment. Where there is any element of public money involved, there is an equally important issue of complex and slow procurement – a major disincentive to private capital.

For the defence industry, our work with ADS[2] has identified a specific challenge with the funding (principally debt funding) for SME companies in the supply chains of the prime companies. Specific issues contributing to this include (i) the Ministry of Defence (MoD) procurement process, which makes it hard to demonstrate a known future cashflow against which a loan can be made; and (ii) the enhanced anti-money laundering (AML) and know your customer (KYC) regulations which apply to this industry.

At a whole-economy level, there is an important role for much greater public-private collaboration. This is a crowded landscape where public funders include the British Business Bank (BBB), the National Wealth Fund (NWF, including the former UK Infrastructure Bank), GB Energy and the nascent Homes England Bank. There are two risks in this architecture: (i) that it crowds-out, rather than crowds-in, private capital; and (ii) that both investees and investors are confused by the lack of a single point of contact. While the former Private Finance Initiative had well-documented flaws which led to it being terminated, it did facilitate significant investment (almost £60bn by 2021). There is a clear need for a new system to match this capital flow.

The effects of this shortfall clearly affect productivity, growth and wages, reducing the UK’s capital stock over time and making GDP growth more reliant on consumption. Under-investment places a brake on productivity but conversely can have a positive impact on employment, albeit one which encourages more, but lower-paid, jobs. This is most obviously seen in the adoption of AI and other new technologies, the future effect of which on jobs can be argued and modelled as either a positive or a negative – in truth, there is no definitive answer. What is agreed is that investment in capital goods (and intellectual property, which is harder to measure) needs to be accompanied by skills policies which prepare the workforce effectively for new industries and ways of working.

How does the UK’s savings rate, corporate structure, or tax regime affect capital formation? 

Since the pandemic, savings behaviours in the UK have changed, with households now setting aside more of their disposable income than even high-saving nations like Germany. The UK savings ratio was 10.9% in Q2 2025. Prior to the pandemic savings peak, the savings ratio was typically between 5% and 10%. International comparators range from 0.6% (Australia) to 35.2% (South Korea). This is, however, only a partial picture, both in terms of quantum and quality. Very weak UK business investment suggests these savings are not connecting with domestic investment opportunities.

The UK has some £3tn in pension savings, and the total pensions fund size compared to GDP is amongst the highest in the world, with an asset/GDP ratio of 96%[3], an opportunity identified by the government in its Pensions Investment Review, as well as by the Mansion House agreements. However, retail savings and investments are not deployed in the most effective ways to deliver economic growth and optimal returns for savers.

Firstly, there is an observable tendency to hold too much in cash deposits. While precautionary cash saving is rightly an accepted part of any individual’s financial management, an excess is economically unproductive as the money is not ‘working’ for the economy or for savers, and real rates of return (i.e. post-inflation) may be negative. Secondly, it has also been argued that too much retail money is invested in housing (an economically less productive asset) versus business equity or debt. This is driven in part by the high price of housing, but also by its performance as an asset class over the last few decades.

The UK tax system plays a role in capital formation. First, for savers and investors, housing (at least the primary residence) has long been a tax-favoured asset in that it is exempt from capital gains tax on sale, unlike equity investment, for example. For corporate entities, changes in recent years to allow full expensing of capital expenditure have been very welcome. However, this is restricted to traditional physical capital goods – plant and machinery. In recent years, investment in intangibles, such as intellectual property, has become more important to the UK economy. The percentage of gross fixed capital formation going to intellectual property products rose from 19% in 1997 to 23% in 2023. At the same time, the percentage going to machinery and equipment fell from 33% in 1997 to 22% in 2023. Investment in intangible assets, such as intellectual property and licenses, does not attract preferential tax treatment in the UK. Although all businesses will in future need to invest more in intangibles, it is likely that businesses in the services sector - which accounts for 80% of UK GDP, compared with the production sectors, which collectively account for 20% (of which manufacturing represents around 18% of GDP) - are particularly affected by this.

While not directly aspects of corporate structure, several identifiable UK cultural norms affect capital formation and investment. These include a high degree of risk aversion (fear of loss or failure), which is also reflected in attitudes towards insolvency and bankruptcy events. The US, where many serial entrepreneurs only succeed after several failures, is an interesting contrast. In the UK, lower tolerance of failure is matched by lower tolerance of success: our culture and politics are not generally supportive of those who have achieved commercial success beyond a certain point.

What international models or policy frameworks offer lessons for the UK? 

Focusing on two of the areas identified above:

Scale-up companies: It has often been observed that the German Sparkassen (Savings Banks) play an important role in providing loan finance to SMEs and the ‘Mittelstand’ in their respective locations. While there may be lessons to be drawn, it should be noted that the respective banking systems of the UK and Germany start from very different places. For equity finance, the most appropriate comparator is the United States – the destination for many UK companies which struggle to scale-up in this country. The drivers of success there are principally (i) scale-related, including in the venture capital and private equity space, and (ii) the successful cluster effects, including for finance, for particular sectors (e.g. Boston for life sciences and California for technology).

Real Assets: We discuss key features of the UK’s public funding institutions below, as these are likely to be significant players in energy investment, urban regeneration, infrastructure and housing. Again, while its history is very different from anything in the UK and derived from post-war requirements to rebuild, key features attributed to the German KfW Entwicklungsbank’s success include its close operational relationship with the government, breadth of staff expertise, and use of conditionalities.

Defence:  We highlight two particular examples. Firstly, the United States, where the Defense Advanced Research Projects Agency (DARPA) has invested heavily in defence and dual-use projects which have had commercial outcomes, including laying the foundations for Silicon Valley and the Californian tech boom. Secondly, Israel, where the per capita investment in venture capital is the highest in the world, supports an ecosystem of over 20,000 start-ups, many with defence or dual-use capability and heavily focused on cybersecurity, fintech, artificial intelligence and digital health.

The suppliers of capital

The primary purpose for any investor is to deliver risk-adjusted returns, rather than the more political issue of what is ‘productive’. The criteria and structuring of investments will vary according to the nature of the institution (bank, pension fund, insurer – often governed by different regulations), and the underlying investor’s risk appetite and requirements as to tenor, liquidity or other requirements, sometimes including ESG. Thus, there is no simple one-size-fits-all solution, rather a range of technical, regulatory and tax intervention solutions.

The UK government and regulators are taking action in some of these areas. For example, through pension reforms, the Mansion House Agreements and, for insurers, the PRA’s Matching Adjustment Accelerator. In the start-up and scale-up segments, the tax incentives for early-stage investors (Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT)) are important incentives which have the potential to be extended to scale-up funding for growth businesses, though changes to the taxation of carried interest have added uncertainty.

Much has been written about the importance of retail investment in equity and associated tax incentives, including through cash and stocks and shares ISAs. This remains unresolved, but in parallel, we see opportunities to simplify the ISA regime and potentially to reform Stamp Duty for investors in UK equities. The ending of widely available financial advice and guidance has hampered the ability of retail investors to make risk-appropriate and ‘productive’ investment decisions. Although policymakers and regulators are taking steps to address these issues through initiatives such as the Advice and Guidance Boundary Review (AGBR) and the proposals for ‘targeted support’, there is still more to be done to ensure that individuals are supported to make informed decisions about the best financial products to suit their objectives.

A further point to note is the impact of the switch to (global index) passive fund investing by pension funds and other asset owners, and its effect on equity investment in small and mid-cap UK companies, driven by fee compression and liquidity requirements. It will be important for the government to review asset management report requirements, and for the government’s proposed Value for Money framework to be effective in returning the emphasis to net investor returns rather than simply lowest fees. The public sector can lead on this through Local Government Pension Schemes (LGPS).

Apart from equity investment, project and infrastructure investment (including housing) remains vital and is suitable for some institutions to invest in, including annuity funds. While assets for these can be de-risked for regulatory purposes, they consist of debt, forward-funding agreements and leases that are nonetheless productive. Greater flexibility to invest at the project level would increase the flow of investment from these sources, for example, in the energy sector. Many institutions find it hard to identify the right projects, to finance in the right structures to meet regulatory requirements, and to secure financing through complex and time-consuming procurement processes wherever there is a public-sector entity involved. This is a significant and growing capital pool which lacks readily available UK assets in which to invest.

We note the importance of UK Public Finance Institutions. The National Wealth Fund (NWF), British Business Bank (BBB), GB Energy (GBE) and the proposed National Housing Bank (NHB) have the potential to be highly valued partners for the private sector, with the ability to play a crucial role in risk sharing by catalysing private capital to unlock investment into priority sectors and support the delivery of the government’s economic growth and clean energy missions. For further information on the NWF’s role, please see TheCityUK’s response to the Treasury Select Committee’s call for evidence on the NWF.

The current public finance landscape in the UK is fragmented. There are lessons to be learned from the UK Infrastructure Bank, and measures that could be taken to improve the effectiveness of these institutions individually and collectively – such as undertaking pipeline preparation, ensuring maximum use of recycled capital, sharpening guarantee activity, and developing innovative blended finance solutions.

Further action is needed to streamline the offering and provide clarity on the roles and interactions of the different institutions. The NWF should support local authorities, alongside the Office for Investment, in developing the right tools and expertise. Strengthening capacity in local authorities would better position them to develop a pipeline of investable propositions, navigate complex funding mechanisms, and attract investment to deliver regional and local strategies. GBE and NHB should similarly focus on leveraging-in private capital, including by de-risking financing using a broad range of grant-funding, guarantees and loan funding. The BBB can provide material support in both investing in start-ups and scale-ups, but also by contributing to the formation of clusters of expertise across major centres in the UK.

Our key recommendation for these institutions is to effectively deliver the mandate set by the government by deploying their limited public capital strategically. For example, the NWF should ensure the most effective and value-for-money use of its £27.8bn, to leverage a defined multiple of that sum. It should only intervene where necessary and seek to make things happen that otherwise would not be possible, and it should not compete against private capital where private capital can secure the investment. They need to focus on being catalytic and additional to the market, taking a different approach to risk and failure. They also need to demonstrate investment leadership by taking on additional risk to facilitate higher impact and targeting investments that support the government’s sectoral policy goals, including the Industrial Strategy. They should effectively leverage private capital by applying a robust understanding of key factors that encourage and de-risk investment at scale across the different types of investment capital available.

What reforms could enhance the UK’s attractiveness as a destination for global capital, particularly from patient or long-term investors? 

The key is to increase investment by making the UK a competitive market in which to invest. Key components of attraction include a consistent and compelling narrative, a competitive cost-base for investors (the UK’s frictional costs of doing business include the costs of tax and regulation) and an ability to move at pace (e.g. in planning). It goes without saying that capital is internationally mobile and there needs to be a strategy to attract and incentivise UK investment. The UK must also move faster to bring emerging technologies, such as cryptoassets, within the UK’s regulatory perimeter. Establishing clear, proportionate regulation would promote investor confidence, while enabling innovation to flourish.

To drive investment into priority sectors and deliver the government’s missions of economic growth and clean energy by 2030 there must be coherence across public investment priorities, planning and skills policy and public policy levers, as well as strategic alignment between the funding institutions, the Industrial Strategy and the 10-year Infrastructure Strategy.

UK tax policies, regulatory frameworks and risk management practices are strongly influencing investment decisions. At an aggregate level, it is vital that the frictional costs of doing business (most importantly, tax and regulation) are competitive and that the UK’s tax, regulatory and legal systems are stable and predictable. This is a more nuanced argument than that for straightforward deregulation and tax reduction – process is important. We are encouraged by recent changes in attitudes to risk management and welcome the approach being taken by senior regulators – this needs to drive deeper cultural and operational change to create a wider divergence between retail customer regulation and wholesale markets, to increase the pace of regulator decision-making and to reduce retrospective judgements and unpredictability.

The seekers of capital

We recognise the importance of well-functioning routes to market and for accessing providers of capital. The growing role of private capital (private equity and private credit) has been widely noted, but for growth companies and the ecosystem surrounding them, it is clear that both private finance and public markets play important and complementary roles, not least as the public float can provide an important means of price discovery and exit for early-stage investors.  The work of our Capital Markets Group has focused extensively on this.[4]

We focus our remarks here on one additional aspect of the ecosystem that may have received less focus in your inquiry – broadening the use of technology in the financing journey for smaller businesses, whether start-up or scale-up. Continued UK leadership in Smart Data initiatives is key to unlocking finance for small businesses. The Data (Use and Access) Act establishes a legal framework for ‘smart data’ schemes, such as Open Finance, enabling service providers to share customer data securely with authorised third parties at the data owner's request.

This enhanced data mobility can drive competition and improve customer experience, but it also has the potential to create more sources of credit for UK SMEs, as well as export opportunities for UK FinTechs in key growth markets. The Centre for Finance, Innovation and Technology (CFIT) found that, by utilising Open Finance, over 25% of SME loan applicants who had been referred for manual underwriting and would potentially have failed to receive an offer of credit could justifiably be given access to finance.[5] 

This could significantly reduce the estimated £22bn funding gap. CFIT predicted that Open Finance could generate over £30bn of growth in the UK economy by boosting lending to SMEs, supporting people to access financial guidance, and improving productivity. In developing the UK roadmap for Open Finance, HM Treasury and the FCA should consider how leveraging Smart Data schemes can improve access to finance.