Independence, but at what cost?
17 September 2014
HornbyChapman LTD’s Paul Chapman examines what a vote for or against Scottish independence would mean for the UK’s financial industry
Image: Shutterstock
Thursday 18 September 2014 is a momentous date in Scottish history. It is not, as some wags would have it, Rabbie Burns’s birthday, the start of the haggis hunting season or even National Chip Day. Rather, it is the Scottish Independence Referendum under which the question, “should Scotland be an independent country?”, will be put to the eligible electorate. The results of the referendum will have momentous implications for both the UK and Scottish financial services industries, which I will attempt to outline in as succinct and, hopefully, unbiased manner as possible.
The campaign so far has been typified by scare stories, disinformation and mistruths on virtually every one of the main issues at stake, however, it is generally agreed that financial services make up a vitally important part of the Scottish economy. Some 85,000 people are employed in the sector directly with an additional 100,000 indirectly. In 2010, the last year for which audited figures were available, this equated to an income of £8.8 billion—86 percent of which was from sales to the rest of the UK, and 7 percent of total Scottish employment.
When this issue went to press, the outcome of the referendum was by no means certain. While the ‘No’ votes may be some 5 to 7 percent ahead in the polls, a last minute surge of support for ‘yes’, or overconfidence/apathy on polling day by ‘no’ supporters, could tip the result either way. If independence does become a reality, then there would certainly be a high degree of confusion and uncertainty for at least the transition period, which is due to end in March 2016. Businesses abhor uncertainty, so would very likely decide to move to the nearest stable economic location.
Let us take just one example of what might happen should independence become a reality: the impact on the pension fund industry upon which much of Scotland’s reputation as a safe, mature and professional location has been built. The creation of a cross-border pension liability—for Scotland would be a ‘foreign’ country as much as France or Greece is currently—would oblige corporate pension funds to fully fund or re-domicile. Some 91 percent of the pensions managed by Scottish firms are for non-Scottish clients. To offset the increased regulation of a cross-border pension scheme, over and above the issues of potentially different taxation, regulatory systems and possibly a different currency, firms would invariably move to England.
Porter’s Cluster Theory states that related expertise develops around a specialisation, so if the fund managers move, then the related lawyers, accountants, actuaries, bankers, marketing staff and insurers would be obliged to follow. These people, whether they live in Glasgow, Edinburgh, Dundee or wherever, spend their salaries in local shops, hairdressers, garages and pubs, so the potentially disastrous domino effects are clear to be seen. The activity and balance levels of banks—or what is left of the banking system after the crises that brought down in 2008—would be severely hit and even now a large number of private individuals are moving their funds south of the border to prevent and potential exchange rate issues post-independence.
In a country that even now spends around £10 billion a year more than it earns, funds would have to be found for a new regulator, to potentially convert all reporting, systems and valuations into a new currency and issue and administer their own gilts (with the attendant issues of not having the Bank of England as lender of last resort and no control over interest rates).
Conversely, one possible benefit to Scotland of independence then there might be an opportunity, with bold and lateral thinking of a type not previously seen by a left-leaning government, to reduce corporate tax rates and position Scotland as an attractive domicile for funds in a way which worked so well for both Dublin and Luxembourg. Sadly, a wholesale lack of vision, confidence or strategic thinking precludes this being countenanced.
An article of this size does not allow me to examine the wider issues of the bloated size of the state, the realistic prospect of NATO (without nuclear weapons) or EU membership—which would only give succour to the Basques of Spain and France to name but one group and hence why membership is extremely unlikely to be granted. My personal view is that the result will be against independence by 40/45 and 60/55 percent. If not, as someone who currently lives in Scotland but works globally, my next article on post-independence Scotland might well be submitted from Singapore
The campaign so far has been typified by scare stories, disinformation and mistruths on virtually every one of the main issues at stake, however, it is generally agreed that financial services make up a vitally important part of the Scottish economy. Some 85,000 people are employed in the sector directly with an additional 100,000 indirectly. In 2010, the last year for which audited figures were available, this equated to an income of £8.8 billion—86 percent of which was from sales to the rest of the UK, and 7 percent of total Scottish employment.
When this issue went to press, the outcome of the referendum was by no means certain. While the ‘No’ votes may be some 5 to 7 percent ahead in the polls, a last minute surge of support for ‘yes’, or overconfidence/apathy on polling day by ‘no’ supporters, could tip the result either way. If independence does become a reality, then there would certainly be a high degree of confusion and uncertainty for at least the transition period, which is due to end in March 2016. Businesses abhor uncertainty, so would very likely decide to move to the nearest stable economic location.
Let us take just one example of what might happen should independence become a reality: the impact on the pension fund industry upon which much of Scotland’s reputation as a safe, mature and professional location has been built. The creation of a cross-border pension liability—for Scotland would be a ‘foreign’ country as much as France or Greece is currently—would oblige corporate pension funds to fully fund or re-domicile. Some 91 percent of the pensions managed by Scottish firms are for non-Scottish clients. To offset the increased regulation of a cross-border pension scheme, over and above the issues of potentially different taxation, regulatory systems and possibly a different currency, firms would invariably move to England.
Porter’s Cluster Theory states that related expertise develops around a specialisation, so if the fund managers move, then the related lawyers, accountants, actuaries, bankers, marketing staff and insurers would be obliged to follow. These people, whether they live in Glasgow, Edinburgh, Dundee or wherever, spend their salaries in local shops, hairdressers, garages and pubs, so the potentially disastrous domino effects are clear to be seen. The activity and balance levels of banks—or what is left of the banking system after the crises that brought down in 2008—would be severely hit and even now a large number of private individuals are moving their funds south of the border to prevent and potential exchange rate issues post-independence.
In a country that even now spends around £10 billion a year more than it earns, funds would have to be found for a new regulator, to potentially convert all reporting, systems and valuations into a new currency and issue and administer their own gilts (with the attendant issues of not having the Bank of England as lender of last resort and no control over interest rates).
Conversely, one possible benefit to Scotland of independence then there might be an opportunity, with bold and lateral thinking of a type not previously seen by a left-leaning government, to reduce corporate tax rates and position Scotland as an attractive domicile for funds in a way which worked so well for both Dublin and Luxembourg. Sadly, a wholesale lack of vision, confidence or strategic thinking precludes this being countenanced.
An article of this size does not allow me to examine the wider issues of the bloated size of the state, the realistic prospect of NATO (without nuclear weapons) or EU membership—which would only give succour to the Basques of Spain and France to name but one group and hence why membership is extremely unlikely to be granted. My personal view is that the result will be against independence by 40/45 and 60/55 percent. If not, as someone who currently lives in Scotland but works globally, my next article on post-independence Scotland might well be submitted from Singapore
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