By Esther Armstrong
Back in 1296, when William Wallace first took up the
mantle for an independent Scotland, the nation had only been shackled by
England's King Edward I for one year. This time around Scotland and England
have been wedded together by one monarch since King James VI of Scotland and I
of England came to the throne in 1603, and one parliament since October 1707.
Moreover, the call for independence from some quarters of
Scottish politics is not nearly as simple as Wallace's one-word rally. Over
more than 300 years the UK has woven a complicated fiscal and monetary web. So
complex, in fact, that if Wallace had been successful in his call for
'freedom', that web may never have been woven.
The referendum on Scottish independence is set to take
place on 18 September 2014 and, while only over-16s living in Scotland get to
vote, the implications will be wide-ranging for the rest of the UK's residents
too. And that is largely because of the size of the Scottish financial services
sector.
An independent Scotland would have banking assets worth
more than 12 times the size of its own economy, which could mean big risks in
the face of another financial crisis. To put this into perspective, Scotland's
position is proportionally far larger than banking assets relative to GDP in
Cyprus (seven times), Iceland (more than eight times) and Ireland (almost nine
times) prior to those countries' financial collapses. These assets are not all
held by Scots either; figures from HM Treasury in the table below show just how
many financial products investors and savers outside Scotland hold with
Scottish institutions.
Meanwhile, Scottish government figures show Scottish
businesses sell more to the rest of the UK than to the rest of the world
combined, and 185,000 jobs depend on the financial sector in Scotland. Finding
a way for the financial sector to continue working to such scale in an
independent Scotland is a major task, and it is not altogether clear whether it
will be an achievable one.
BETTER TOGETHER
The pro-union campaign Better Together is led by former
chancellor Alistair Darling. It points out that the size of the UK market means
the costs and risks of financial services are spread across the whole country,
while in a smaller country those costs could be passed on to customers. As an
example, if independence resulted in even a small rise in the cost of a
mortgage, say 1 per cent, it could cost the average Scottish household with a
75 per cent mortgage on their home around £1,300 more in increased payments in
the first year, Better Together claims.
One of the most pressing considerations, should Scotland
become independent, will be which currency the country uses. If a decision is
made to create a separate currency this could have a massive knock-on effect on
savers and investors, because it would most likely mean following a distinct
monetary policy, and therefore the country setting its own base rate.
There is still no agreed policy from the pro-independence
movement on which currency Scotland would use. Some campaigners in favour of
independence, such as Dennis Canavan, chair of the 'Yes Scotland' campaign and
former Labour MP and independent MSP, have backed the creation of a separate
Scottish currency. Meanwhile, the Scottish National Party's short-term position
is to keep the pound, leaving the door open for changes further down the line.
If Scotland decides to opt for its own currency and
monetary policy committee, terms for Scottish investments and financial
products could be vastly different from those in England and Wales. This is
because the base rate sets the interest rates of many products. So, in the case
of inflation-linked products, such as floating mortgages, different policies
would have to be designed for residents in and outside Scotland.
FSCS PROTECTION
Perhaps of even greater concern is whether or not the
Financial Services Compensation Scheme (FSCS) would still provide financial
protection for those living in Scotland, or for those living outside Scotland
who hold savings and investments with Scottish companies.
A Scottish government spokesperson says: 'Following a
vote for independence in 2014, Scotland will remain part of the UK while the
terms of independence are negotiated. The FSCS is funded by the financial
services industry and customers in both Scotland and the rest of the UK would
remain protected.
'The Scottish government would ensure that arrangements
for an effective compensation scheme are in place, mirroring the level of
protection provided in the UK FSCS, and in line with European harmonised levels
of consumer protection,' he concludes.
But Owen Kelly, chief executive of Scottish Financial
Enterprise (SFE), which represents Scotland's financial services industry, is
not convinced. 'As far as we know, little work has been done on whether or how
the FSCS could continue to cover Scottish depositors or savers or, indeed, how
or whether a Scottish scheme could cover non-Scottish depositors or savers,' he
says.
Also, Kelly says the pro-independence argument that the
Financial Conduct Authority and Prudential Regulation Authority could continue
to cover Scotland even after independence is problematic. He points out that if
Scotland wanted to remain an EU member state it would presumably have to fall
in line with the rest of the members in having its own regulator. Additionally,
he does not see any obvious benefit to the rest of the UK in bearing the risks
and liabilities of regulating Scotland.
Kelly stresses the SFE is not politically motivated but
needs to understand how independence could affect its members. Indeed, coming
across as politically motivated is a fear held by a lot of financial
professionals in Scotland.
One wealth manager, who does not wish to be named, says
the company has to keep in mind that it has clients who are anti- and clients
who are pro-independence and it does not want to alienate any of them.
WHITE PAPER
A number of financial services firms are voicing
frustration that there has not been more clarity and certainty around what the
post-independence economic landscape would look like. However, the Scottish
government, led by the SNP, is expected to issue a White Paper before the end
of November with more information.
Kelly says there are five key questions surrounding
independence that are most relevant for investors and savers, both within
Scotland and outside: What currency could be used? Under what terms could
Scotland be a member of the EU? What will be the effects of independence on the
current single market for the financial services in the UK? How long would a
transition to independence take and how would the process be managed? And,
lastly, what would be the requirements for financial regulation?
The scariest part for those living south of the border is
that they will have no say in whether Scotland splits from the UK or not, and
no input into the answers to these questions, which could go to a referendum
once the independence vote has been cast. In the meantime, savers and investors
are held hostage. Maybe Wallace would have had a quicker answer?
Source: moneyobserver.com
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