Uncertainty around whether UK financial products will be supported in an independent Scotland could force Scottish-based platforms to register their companies outside the country and move UK investors with Sipps and Isas into these new businesses.
As part of the UK single market, Scottish-based platforms are able to administer unique tax-free savings products, including Isas and Sipps.
As with all financial services firms in Scotland, customers in the rest of the UK account for a significant portion of business for platforms operating out of Scotland.
For example, Alliance Trust Savings estimates 80 per cent of customers on its platform are based outside of Scotland in the UK.
But a recent report by Rathbones reveals Scottish-based platforms with UK investors holding Sipps and Isas would also be in breach of EU cross-border rules in the event of independence as administrators of these products are not allowed to be based in a “foreign” country.
The report adds the situation would follow a similar pattern for savers in Scotland who have these products invested on platforms based in the rest of the UK. One senior provider source, who wished to remain anonymous, says this would be a significant and costly issue for platforms based in Scotland that is likely to see firms move all or part of their business south of the border.
The source says: “This would be a massive issue for Scottish platforms because they would have to re-register all or part of their business outside of Scotland, so they will run two businesses in future.
“This may sound like quite a simple thing to do but it’s not because you are changing the legal status of the contract written under one country’s legal jurisdiction so that it applies to another separate jurisdiction. This is potentially very costly and time-consuming. It is not to be sniffed at.”
The source told Money Marketing the platforms market could shrink in Scotland as a result of independence.
Alliance Trust Savings says it has already taken steps to set up a paper company in England to allow for the transfer of its UK customers following independence.
A spokesperson for ATS says: “To remove any uncertainty, we have established additional companies which will be registered in England. “This active decision would enable our non-Scottish customers of ATS to manage their assets in a company in their own jurisdiction and currency, along with our commitment to work with our Scottish customers to work within the framework of whatever a new Scottish administration decides to establish.”
“You could argue that Scottish regulation would cost less because the overheads on the regulator’s budget would be significantly less.”
Standard Life declined to comment on the impact an independent Scotland would have on its platforms business. The company says if it felt the interests of the business or clients were put at risk, it will take “whatever action necessary to protect their interests”.
Scottish Widows, which has a direct-to-consumer platform, also declined to comment. Nucleus and Aegon are registered in England for their platform businesses.
The future of Isas in an independent Scotland has already been thrown into question because they are unique to the UK market and can only be sold to UK residents.
The Scottish government has said it will continue to offer Isas in an independent Scotland. But the Treasury’s Scotland analysis paper argues while Scotland could create its own Isa equivalent, these could not be sold and administered on a UK wide basis.
Tisa technical director Jeffrey Mushens says: “An independent Scotland would have to agree with the UK to transfer confidential tax data across including national insurance numbers and tax status. It would also have to set up its own HMRC and going forward is it going to offer its own Isas?
“All of these things are doable but the difficulty is practicalities of carrying out this enormous operation in such a short period of time. Scottish firms also won’t be able to offer the current UK Isas so what would it do with its UK business? Does that mean the business will have to be forcibly disinvested or transferred to third parties?”
Brewin Dolphin divisional director for Edinburgh Bryan Johnston says the lack of clarity around Isas is just one of many queries that the firm put to Scottish finance secretary John Swinney, but as of yet remains unanswered.
He says: “We have written to John Swinney asking about issues such as Isas, pensions, national debt and separate regulation but we haven’t in fact had many satisfactory answers. That is probably the biggest issue with which we’re all faced, there are no guarantees whatsoever.”
The Lang Cat principal Mark Polson expects to see financial services firms based in Scotland opening offices in the rest of the UK to enable them to split their operations between Scotland and England.
He says:”If there is a yes vote there would be a period of negotiation so although this does present an issue it is not one that needs to be resolved now. People don’t need to do anything at the moment.”
Verus Chartered Financial Planners co-director Paul Lothian arguies a lack of certainty is one of the biggest issues for advisers and their clients. He says: “Most of my clients have expressed concern mostly around the uncertainty. I have yet to meet one who is in favour of independence.
“They are worried about what the currency and tax regime might be, all of which we don’t have answers to.”
But Murphy Wealth partner Adrian Murphy says it is not yet feasible to expect answers on these key issues. He says: “What the Scottish government has done is lay out how it would like to do things. This is really all they can actually do at this stage of the debate, until negotiations between the UK Government and the EU can get underway after a yes vote.”
Hargreaves Landsdown head of pensions policy Tom McPhail says one area yet to be explored in depth is the duplication of costs for financial services firms and consumers through dual jurisdiction.
McPhail says: “Any consumer communication will have to reflect both jurisdictions. This will take place at a variety of different levels across businesses. It is not known what this cost would also be to investors not just in Scotland but right across the board, and what the drag on product returns may in turn amount to.”
A better regulatory environment?
If Scotland becomes independent and part of the EU, it will have to set up a separate regulator from the UK in order to meet European rules requiring that each individual member state has its own regulator. The Scottish government has set out plans to create a Scottish regulator largely based on the existing rulebook for the FCA.
Thomas Miller Investments head of UK private investment management Harry Morgan says: “Setting up a different regulator would definitely take additional time, when we are just getting used to the FCA and PRA. It would also mean additional cost.”
But Murphy says this cost could be balanced out by the regulatory environment being far smaller and less complex than the existing UK landscape. He says: “There will be some initial set-up costs but in theory you could argue that Scottish regulation would cost less because the overheads on the regulator’s budget would be significantly less.”
Expert view: Ralph Jackson
Just two months to go to the vote on independence for Scotland and yet questions remain unanswered to assess the impact that a yes or no vote would have on UK financial services. The sector is one of the big battlegrounds for the UK and Scottish political classes. The value of financial services to Scotland is some £9bn with around 85,000 people employed in the sector alone, yet the majority of financial services business is conducted south of the border irrespective of the provider’s base.
The key issues for anyone in financial services seeking answers revolve around regulation, currency, tax, and the transition period. All these are mostly shrouded in mystery. The Scottish government will not assess tax rates ahead of a vote, nor declare definitively whether sterling will remain the currency of Scotland. Little wonder that, so far, Standard Life, Royal Bank of Scotland and Alliance Trust are allegedly uncertain about their respective positions on independence.
The largest degree of uncertainty is around financial regulation. If Scotland was to become a separate country, then as an independent member of the EU this would require an independent central bank, and a new financial regulator. The issue is not just around bailouts and the lender of last resort but who looks after depositors and their money.
There is no provision for a separate Financial Services Compensation Scheme although the Scottish government says it “would ensure that arrangements for an effective compensation scheme are in place, mirroring the level of protection provided in the UK FSCS”. As for timescale of implementation, the arguments still vary.
On balance it is clear the sector does not want Scotland to be independent. There is nothing to indicate substantial changes are afoot among providers and advisers if a yes vote is the result, so those answers need to come quickly and unequivocally for confidence to be maintained.
Ralph Jackson is director at Lansons
In numbers: Scottish independence cost estimates
The estimated amount it could cost an independent Scotland to set up its own pension protection fund
Start-up cost for a Scottish pensions regulator
Approximate cost for a Scottish equivalent to Nest
Cost of SNP’s plan to increase the state pension to £160 per week
Source: Hargreaves Lansdown
A series of independent reports from the N56 thinktank, backed by business, recently assessed Scotland’s current financial standing and its economic potential. The Scotland Means Business reports set a target for the nation to move from being the 14th wealthiest in the world (ahead of the UK, France and Japan) to a top five position.
They said to meet that ambition, we must nurture the industries in which we have a competitive advantage. Perhaps unsurprisingly, the financial sector is a priority but its growth will rely on a number of factors, including a competitive tax regime, infrastructure, and a highly skilled workforce.
Scotland’s financial sector is a great strength but we have the potential to do even better. I believe we can build on our existing strengths in finance to create a “Frankfurt of the North” including more new entrant banks, asset managers and pension funds.
At present our potential is limited by a straightjacket of Westminster public policy tailored to the short-term interests of London and the South-east of England. We also suffer from a London-centric economic model whereby our wealth and talent is drained south. If Scotland is to be all it can be we need the full job-creating economic powers of independence.
There are of course specific opportunities for the financial services sector such as the financial management of an oil investment fund or new public and private sector infrastructure. Jupiter Asset Management, among others, has highlighted the business opportunities they see from an independent Scotland.
Most of all, Scotland’s financial services industry will benefit like everyone else from decisions about the future of Scotland being taken by those who care most – the people who live and work here.
Stewart Hosie is an MP for Dundee East, and an SNP finance and treasury spokesman
Almost all the customers to whom Scots financial workers sell investments, mortgages and pensions live in the rest of the UK; of the 200,000 pensions sold by Scottish firms last year, just 20,000 were sold to Scots.
As well as selling financial services to the rest of the UK, Scots customers choosing a mortgage, a pension or savings product have easy access to UK companies. This is an obvious benefit of sharing across the UK. For example, there are two million UK Isas located in Scotland.
In workplace pensions, the Institute of Chartered Accountants highlighted the fact that cross-border defined benefit company pension schemes must be fully funded. Given the total UK pension scheme shortfall currently stands at more than £177bn, the costs of doing business in a separate Scotland and UK suddenly just got much more expensive.
The view of the SNP? An exemption for Scotland will be granted. Apparently the 28 members of the EU which have to follow the funding rules on cross-border schemes will look kindly on the nationalists’ request for special treatment.
Nor has the SNP got credible answers on how to replicate the sophisticated UK regulatory architecture which protects the pensions of Scots.
The majority of Scots want the security and opportunity which being part of the UK-wide financial services market offers; the nationalists know this too, which is why they assert that Scotland can reject the UK yet retain membership of the UK’s single currency, single market and financial regulatory architecture. This is hardly realistic. There is only one way for Scotland’s financial sector and consumers to maintain the advantages of the UK financial services system; to remain in the UK and say ‘no thanks to leaving’.
Gregg McClymont is the shadow pensions minister