By Mark Sands and Valentina Romeo
After five weeks of fierce election campaigning, the results are in. Both the FTSE 100 and the pound jumped on the news of an unexpected majority secured by the Conservatives, a result far removed from the hung parliament scenario consistently touted by the pollsters.
But the election throws up a raft of issues that will impact advisers, not least the looming in/out referendum on membership of the European Union tabled to take place before the end of 2017.
The defiant showing by the SNP also brings its own uncertainty.
Does this mark the Scots pushing at the independence door yet again? Are we moving towards more devolved powers to Scotland, with the power to set income tax at one end of the scale and full fiscal autonomy at the other?
Money Marketing examines the issues advisers and their clients will have to grapple with over the coming weeks and months in the wake of last week’s political bloodbath.
The in/out issue
The fund management industry has already set out its stall in pushing for the UK to stay within the EU. Investment Association chief executive Daniel Godfrey argues if the UK were to turn its back on EU membership the investment management sector would be damaged as a result.
“The UK’s membership of the EU is very beneficial to the investment management sector, which is the largest in Europe by some considerable margin.
“While the British investment management sector would prosper in any event, we regard it as being in our best interests to be at the heart of a successful Europe.”
Vanguard chief economist for Europe Peter Westaway says while market uncertainty about the election has died away, the EU referendum poses longer-term questions.
Westaway says although the EU question is not about to derail the stockmarket right now, this uncertainty will gradually start to make itself felt.
He says: “It could potentially cause real economic decisions to be put on hold, for example firms being more uncertain on making investments in their business if they want to expand.”
Wealth Management Association deputy chief executive John Barrass says people should not assume there’ll be “a lot of less regulation with an EU exit”.
“We might not get less regulation, but better targeted regulation. In the wealth management sector you’ll get a much better understanding of the specificities of our industry and our sector.”
But Barrass says one of the impacts of an EU exit, if it were to come to pass, would around client passports.
“We don’t have a huge cross border business in the wealth community but what we do have is connected with British nationals who have retired to other countries like South of France, Spain or Italy.”
“If we leave the EU the passport registration will finish. You’ll get a lot of more complexity in the market in relation in the way firms handle clients and that could also lead to a loss of potential clients.”
JP Morgan Asset Management chief market strategist for Europe Stephanie Flanders says the most important thing for investors now is Europe. “We know for sure now that we’ll have a referendum and it is going to be hard for the Prime Minister as it will be extremely challenging to extract a deal with Europe.”
Flanders says the main question now is what the trade relationship with Europe will be.
“Conservatives have more than ever a legitimate power on negotiations. So now they need to have a conversation.
“The closer the referendum comes you’ll see naturally people moving out from UK gilts. However, you’ll keep seeing the UK growing faster at the end of this year compared to other countries in Europe. The currency is not overvalued and there are no short-term concerns.”
Regardless of what new powers Scotland ends up with, the country still has a stake in whether it remains part of the EU.
Scottish Financial Enterprise, which represents the Scottish financial services industry, is acutely aware of the impact of upcoming political wrangling, both at an EU and UK level.
Chief executive Owen Kelly says: “For our industry there are many advantages for being in the EU, and leaving would only be the beginning of the process in terms of understanding the consequences. If we have a referendum and the UK decides to leave the EU, that is just the beginning of a longer period of uncertainty.
He believes that it would be better for business if the situation is resolved before 2017.
Kelly adds: “We need to try and hold the referendum quickly and decisively so that the uncertainty can be brought to an end.”
What now for Scotland?
Perhaps the more pressing issue for David Cameron to deal with is that of the future for Scotland.
Kelly says the scale of the SNP victory, winning 56 seats out of a possible 59, demonstrates the very real disconnect between voters in Scotland and the parliament in Westminster.
He says: “From a business point of view, that raises questions about whether there will be more change to the taxation systems across the UK.
“If you propose a different tax system you are also proposing different products for our industry and having two markets instead of just one.”
Kelly adds companies will need to decide whether they can continue to provide the same services to everybody in the UK at the same cost. But he says this is impossible to predict at this stage, until we see some more detailed proposals.
Experts say the SNP is likely to use its new found political clout to push for further devolution of powers to Scotland.
The Conservative manifesto committed to the recommendations of the Smith Commission, promising the Holyrood parliament authority to set income tax rates north of the border. However, it fell short of demands for full fiscal autonomy.
Instead, the Tories plan to guarantee that more than 50 per cent of the Scottish Parliament’s budget will be funded from revenues raised in Scotland, while also maintaining the Barnett Formula as the basis for determining an additional grant.
The Conservatives have promised a new Scotland Bill in their first Queen’s Speech on 27 May.
Dalbeath Financial Planning director Matthew Harris says: “Most financial regulation is set by the FCA and that is not going to change, so SNP dominance will have little impact on pensions.
However, this kind of win for the SNP gives them the political capital to push forward some changes.
“Scotland may be given more tax raising powers – if they change income tax rates compared to the rest of the UK, that could have a dramatic impact on where people choose to live.”
Syndaxi Chartered Financial Planners managing director Robert Reid adds it may not only be Scottish residents considering their plans.
“After devo max, the issue for advisers working in both England and Scotland is, where do you base your company? Are you disadvantaged because of the different tax treatments in different parts of the country?
“It could be difficult and expensive to do both – you might want to have a separate office in England and Scotland. It becomes an arbitrage thing – you might base your head office depending on the most favourable rate of corporation tax.”
Regulatory consultant Richard Hobbs says the fears mirror those raised in the build up to last year’s independence referendum.
He says other Scottish-based financial services firms, such as Standard Life, are already beginning to express concerns of an anti-business agenda coming from the SNP.
“Previously people had thought the SNP would have it quite easy, carving themselves a host of new powers for Scotland. But the question then becomes how do they exercise them?
“If you are going to tax and spend then you quickly discover that business will start defecting across the border to England where tax is better.
“The jobs could just defect away slowly and then you will end up with a shell of a financial services industry in Scotland.”
MRM head of public affairs Havard Hughes argues the Conservatives may be eyeing a boost to their own popularity north of the border.
While David Cameron’s party remains the third most voted for in Scotland, its vote share only dropped marginally in last week’s election.
Hughes says: “The SNP and the Conservatives both want Scotland to have greater fiscal autonomy, but the Tories think that giving some degree of fiscal responsibility to the Scottish parliament will force the SNP to make some tough decisions.
“As the Lib Dems learnt last week, that can be very toxic to your re-election chances, and as soon as you have a situation where they might run out of money then it’s much easier to make a Conservative argument.”
Others warn the SNP will likely use Conservative plans for an EU independence referendum as the starting point for a new independence campaign.
Verus Wealth co-director Paul Lothian notes the EU enjoys greater popularity north of the border, while the SNP is also unhindered by a Eurosceptic wing.
He says: “SNP will say this is another example of us being at the beck and call of the Tories. The prospect of both those referendums will create a great deal of uncertainty for businesses in Scotland.
“Either the SNP will want a Scottish referendum to coincide with the EU vote, or they will say if the UK votes to leave the EU we want another referendum.
“Uncertainty is never good for markets and as an adviser you have to steer the course of that uncertainty.”
Murphy Wealth partner Adrian Murphy says membership of the EU remains “crucial” for Scotland.
“Leaving the EU could be disastrous for businesses in the UK and could be the catalyst for another Scottish referendum.
“People are nervous about change and the conversations I will be having with clients – particularly older clients who are less likely to vote SNP – will be concerns about independence. It is our job to try and allay those fears.”
Hughes argues Cameron’s guarantee of an EU referendum means a vote will become a more existential question than just gauging the popularity of Brussels.
He says: “Some of the arguments will be that we need to stay for the financial services sector, for example. But people will also talk about the need to keep the UK together.
“You can see the referendum shaping up not just to be in terms of the EU but also for whether we stay together as a country.”
Some have speculated the Conservatives will look to use the debate over Scottish devolution to push for greater autonomy for Wales and England.
The Conservatives are already committed to giving the Welsh Assembly more independence, though this is unlikely to extend as far as reforms in Scotland.
Cicero director Iain Anderson says: “We know that all of the Smith Commission is going to get delivered. The question I have in my mind is how does David Cameron go forward?
“He could go into deep negotiations with Nicola Sturgeon, or they could have a real consultation process, like a Scotland white paper, or they could have a full constitutional convention, which doesn’t just look at Scotland but also considers all four nations.”