Over the past few months, analysts from some of the world’s leading financial institutions have been offering their analysis on what might happen following a ‘yes’ outcome in the September 18th referendum on independence in Scotland. The financial services industry in Scotland, and their umbrella group Scottish Financial Enterprise (SFE), has been paying close attention to the reports. The analysis has come from such prominent international firms as Berenberg, Bank of America Merrill Lynch, Goldman Sachs, Standard Chartered, Deutsche Bank, Kleinwort Benson, Fathoms, Barclays, Exane BNP Paribas, Credit Agricole economic and sector analysis, Blackrock, Standard & Poor’s, Citi Research, Moody’s, Commerzbank, UBS, Fitch, Winterflood, Clydesdale and Credit Suisse. Here’s what they say.
On the currency, the consensus is that a currency union with the rest of the UK (rUK) would be unlikely to be credible. However, some, such as Berenberg and Deutsche Bank, suggest that it is technically possible, but it may mean ceding more control over Scotland’s economy to the UK then would be acceptable to the Scottish Government. Berenberg, for instance, argues that the most likely scenario is Scotland introduces its own currency with some form of Sterling peg, and that “Scotland could prosper with its own currency after a painful transition.” And others, such as Goldman Sachs, suggest that “without political and fiscal integration, it is difficult to see the rest of the UK agreeing to provide a monetary and financial backstop to Scotland.” Others, such as Standard Chartered, argue that if Scotland chose to walk away from its share of the national debt, “the cost of borrowing would be significantly higher until Scotland could re-establish itself as a credible issuer.” Credit Agricole agrees, arguing that the Scottish Government currency proposals are not sustainable, and suggesting that the introduction of Scotland’s own currency, while the most likely scenario, could also “trigger capital outflows” from Scotland. And Standard & Poor suggests, “the costs of separating Scottish and UK operations and transferring Scottish customers to a new currency would be considerable.” Along similar lines, Citi Research argues that it is “astonishing” that the Scottish Government has no plan B on the currency.
On Scotland’s financial services sector, the consensus appears to be that a significant portion of it would have to re-domicile (move) to the rUK. Commerzbank, for instance, argues that there is a “strong possibility that major Scottish banks would relocate to London,” but also goes on to caution that the dire warning from the UK government over the financial services industry in Scotland is likely overdone. Credit Suisse, however, suggests that a significant portion of the financial sector is likely to move to the rUK. Barclays Equity also point out that EU rules require banks to be located where the majority of their customers are located, which, for Scottish banks, is in the rUK. Such a migration might be triggered, they suggest, by a vicious circle of a few re-domiciling in to the rUK, leading others to feel that they too will have to migrate their business activity south. Standard & Poor also argue that “Scottish independence has the potential to drive negative rating actions on insurers operating in Scotland.” Such a migration, Credit Suisse suggests, could undermine the tax-base in Scotland, given financial services’ substantial contribution. Similarly, Tower Watson warns that pensions in Scotland could become much more complex, making them costlier. And while Blackrock agrees, they also caution that if financial institutions re-domicile to the rUK, it is unlikely that there would be a wholesale relocation of staff.
In the past few days, of course, we have seen financial institutions such as Lloyd’s, RBS, and Standard Life announce that they are setting up legal entities in England as a contingency so that they can change their domicile if necessary following a ‘yes’ vote. The risks for these institutions from unresolved uncertainties around the currency, tax policy, how they might be regulated, how international markets might react to a sovereign Scotland, and most importantly, potentially having their head offices in a separate jurisdiction from where 90% of their UK customers and trade are located, are very great indeed. And while for some of these companies, moving the ‘brass plate’ and some of the head office functions to, for instance, England, may not necessarily mean that significant jobs also move, it does mean that some most certainly would, as would some of the advisory services (accounting, consulting, legal, sub-contracting etc.) that support these institutions. There is also a question about what the implications are for having the key decision-makers in large businesses located in a foreign country? Would that have any impact on future investment in Scotland if there is no longer a ‘home market’ bias? Banks are also critical enablers of other businesses, small, medium and large. What are the implications for domestic banking in Scotland if head offices are located in what would be a foreign country after independence? Could the capital flight we’ve seen over the past few days from Scotland make it more difficult environment for finding loans to expand businesses? We simply don’t know.
Our research shows, however, that such contingency plans are not just being put in place by financial institutions, but also PLCs in other industries as well. If their share prices continue to be affected by uncertainty and volatility in Scotland, we can expect to see more of these companies announcing similar contingency plans. On the whole, it is appearing that the analysis of international financial institutions noted above is proving prescient. If these contingency plans are put into action, Scots can expect a drop in economic output, and the employment and tax revenues for government coffers that it sustains. How great this might be, however, is one of the many unknowns that the referendum outcome poses.
In sum, there appears to be an emerging consensus amongst international financial institutions that a currency union is unlikely with the UK, and that Sterlingisation (using the pound Sterling without a formal agreement with the UK government), while feasible, would be neither credible or sustainable. An independent Scotland would, therefore, be most likely to introduce its own currency in some form. The financial services industry, which makes significant contributions to the Scottish tax-base, would also be likely to see some movement to the rUK, although how much of the financial services sector would re-domicile is uncertain. And while some, such as Commerzbank, argue that “an independent Scotland will fare rather better than the Westminster Government believes”, it will also “endure considerably more pain than the Scottish Government is prepared to admit.”
