The trouble with regulation, as many in the industry will attest, is often the unintended consequences. The same is true of referenda. Even if Scotland votes to reject independence, as in Canada where another referendum followed the first 15 years later, the consequences will likely have a long shadow for the financial services sector. Unlike Quebec, Scotland has a disproportionately large and highly-successful financial services industry; banking assets alone are nearly thirteen times larger than Scotland’s entire GDP.
For centuries firms based in Scotland have led the way in fields as diverse as asset management and banking. They are quite literally high street names across Britain. All have benefitted from a large stable market into which to sell their products. It was the Scottish industry that pioneered life insurance, investment trusts and professional standards. Consequently, Scotland is home of the oldest professional bodies of both banking and accountancy. Scottish firms manage £800bn in funds and the industry as a whole employs some 100,000 people.
Before the crash, financial services would have been trumpeted as the flower of the Scottish economy with politicians falling over themselves to praise the industry. After all, you often hear the refrain “Scotland’s oil”. The paradox is that oil currently contributes only around £4bn to the Scottish economy, and falling. Yet according to Scottish Financial Enterprise, financial services contributes nearly double this at some £7bn. The unpopularity of bankers has meant that few in Scotland are prepared to speak-up for what has become, almost overnight, an unpopular cause.
Even assuming the separatist vision accords to the reality, the risks for the industry are profound. Firms would have to operate under different tax and legal regimes, apply for re-authorisation and be separated from the majority of their customers by a new national boundary.
The conversations are, however, taking place in the shadows. Few in the industry in Scotland wish to enter the political fray. Fewer still to incur the wrath of the nationalist establishment and their vicious keyboard-tapping band of “cybernats”. Consequently, many of Scotland’s largest firms have been forced to explore the implication of independence and to raise any concerns behind closed doors. Only a brave few such as Standard Life have publicly spelt out the consequences.
Until such a time as all the uncertainty is resolved one place where there will be little silence and where the lights will burn extra bright are the offices of London law firms. The tragedy for jobs in the Scottish financial services sector is the effect of momentum. Having taken such expensive advice, anticipating the risk of future secession, many institutions will conclude that they might as well go ahead and move. You only have to look to Canada to see what can happen to a financial centre faced with recurring political uncertainty caused by a “neverendum”.
According to Mark Milke of the Canadian think-tank the Fraser Institute, Montreal has slipped from being the “Gibraltar of the Canadian provinces” after the Great Depression of the 20th Century to being merely the third-largest home of head offices in Canada in the 21st. The blame for this decline is laid squarely on Quebec’s high-taxing nationalist governments.
Firms have literally been driven into the arms of neighbouring provinces. Even the Bank of Montreal has moved its headquarters to Toronto, retaining only a fig-leaf presence in Montreal itself. An omen perhaps for what might happen to RBS’s sprawling Gogarburn headquarters? Only time will tell.
With all the parties pledging greater devolution and tax and spending powers for the Edinburgh Parliament, the Scottish financial services sector could be facing a perfect storm. London’s lawyers and financiers will be rubbing their hands with glee. This is surely not what the nationalist cause intended.
Havard Hughes is head of public affairs at MRM