According to the survey, 80% of respondents expect business prospects to either improve or stabilise over the next 12 months. This is backed up by the 87% of respondents who are expecting turnover to either improve or stabilise in the coming year. This confidence is built on solid financial performance during the last year with 64% of respondents reporting turnover and profit margins to be either stable or improved.

"Firms are reporting pleasing results for the last twelve months and have even greater expectations for the year ahead. Overall, the mood is one of tentative optimism," said Natasha Lee, a director and head of the Financial Services Markets Group at Smith & Williamson, the accountancy and financial services group.

The research also suggests that the City has overall confidence in the UK economy, with 81% of respondents believing it is stable or improved compared to a year ago. More than two-thirds believe that political factors such as Government spending cuts will not have a major impact on their business.

However, almost half (48%) of respondents believe London's reputation as a major financial centre has declined in the last year – in the two previous years' surveys some two-thirds of respondents held this view. New York continues to be considered the biggest threat to London, followed by Frankfurt, Shanghai, Geneva, Zurich and India, which have more appealing tax and/or regulatory regimes than those of the UK.

"Given the potential tie-up between Deutsche Borse and NYSE Euronext, our findings are very pertinent. London's position remains very strong, but the growing level of UK tax and regulation coupled with the increasing strength of rival stock markets is threatening London's position," added Natasha.

The results are part of Smith & Williamson's 13th annual survey of FSA regulated businesses based in the City of London.

The survey also explored which factors will most affect business growth over the next 12 months. Top of the list were regulatory requirements, changes in tax legislation and economic factors.

Two-thirds (65%) believe regulatory requirements are likely to restrict the development and growth of their business over the next 12 months. This concurs with the 63% of respondents expecting expenditure on regulatory compliance to increase over the same period.

"Though this may not please firms, the Financial Services Authority (FSA) may take some comfort from these results, given its belief that firms are growing too quickly with under-resourced compliance functions," said Natasha.

Overall, headcount is expected to remain stable or increase (93% of respondents), which is similar to last year. However, the balance of personnel within firms is expected to shift towards back office staff. Despite changes in the UK's remuneration code and tax legislation, 73% of respondents reported that they are not expecting to change the way they incentivise employees.

Tax legislation is expected to have a negative impact, with 40% of respondents reporting that the changes will hinder the development and growth of their business. Said Colin Aylott, a corporate tax director at Smith & Williamson:

"Undoubtedly, firms are wary of all the potential tax changes which could hit them and uncertainty is a massive problem affecting large and small businesses in the City across pretty much all sectors as no one quite knows whether a tax on transactions will be brought in or if bonuses will be subjected to further tax or regulation. Don't forget the introduction of the 50% income tax rate affects proportionately more people in the City than other walks of life. And from April this year, we will see additional NI costs which will hit just the same people and their employers."

Background on the survey

75 FSA regulated firms from across the City took part in the survey. Respondents included fund managers, IFAs, insurance companies, securities trading companies.