Scotland the Brand is in peril as sun rises in East

Published on Sunday 27 September 2009 21:56

ARE you a Distinguished Financial Crisis Survivor (DFCS)? Or an Order of the Battle of the Banks (OBB with Oak Leaf Clusters)? Whatever your rank, polish those medals, for the first anniversary celebrations get under way next month. Perhaps there should be a memorial march past at Gogarburn led by Sir Fred Goodwin, or a commemorative wreath-laying and 21-gun salute at the old Bank of Scotland headquarters on The Mound.

Two questions will dominate these veterans' rallies: what is the future for Scotland's financial sector and the prospects for Scotland as a global banking brand? For even though the sector finds itself, one year on from The Debacle, in better shape than we had dared hope a year ago, there is a deep unease that we might be at or near the end of a definably Scottish financial sector. For all the cheer-leading of Scottish Financial Enterprise (SFE) and the Financial Sector Advisory Board (FiSAB), the levers of power and influence are moving beyond their reach, and our ability to determine and control the future of the sector slipping from our grasp.

Scotland and Scottishness will have markedly less relevance to the USP of a financial services company. The threat to Scotland's position in finance has been building long before the global financial crisis – this has acted as an accelerant, not a catalyst, of our loss of brand power.

Three positive points can be made. The much-feared collapse into a second Great Depression has been avoided, due to unprecedented official action at UK level. Second, the shake-out in the sector has, in employment terms, also been less severe than feared. Indeed, it may well be that, with the expansion of Tesco and others in Scotland and the new jobs these have brought, there may be little if any net financial job loss.

And third, some evident stabilisation has set in, with recoveries in mortgage lending, house prices and business confidence. Shares in stricken banks have risen sharply, and while still far below 2007 levels, there is now talk of fresh equity capital raising – a resort inconceivable six months ago.

So what is the nature of the threat the sector now faces here? There are broadly three developments that are re-shaping the financial sector as we know it – corporate, global and regulatory. Corporate change has already sharply reduced the relevance of Scotland as a financial brand. As financial analyst Robert McDowell has noted, of the 87 members of SFE, only nine financial firms (belonging to six companies) have the word "Scotland" or "Scottish" in their title. Now the future of Scottish Widows as an Edinburgh-based part of Lloyds Banking Group is in contention. It is hard to see how this process of corporate change with its shift away from a specific geographic definition and identity will reverse itself any time soon.

Second is the relentless, intensifying shift in global financial power from West to East. A global survey last week of international financial centres saw a pronounced rise in the number and size of Asian financial centres and Glasgow and Edinburgh slipping down the table. The switch in global financial oversight from the G8 to G20 is further evidence of this massive shift.

The third concern is regulatory. The locus of regulatory power and supervision is moving to Brussels, with a baffling new range of acronyms to contend with. There's the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), the European Securities and Markets Authority (ESMA) and now, at the macro level, the European Systemic Risks Board (ESRB). Our lobbying role is now as an adjunct to that of Westminster.

Some idea of the potential threat that well-intentioned EU regulation can pose to Scotland as a financial centre can be gauged by the ferocious battle that the investment trust industry is now having to mount against an EU Directive to regulate private equity and hedge funds. Unless the proposals are modified, the Alternative Investment Fund Managers (AIFM) Directive will have damaging implications which will unnecessarily prevent investment companies from operating as they do today. It is, as guests at the Association of Investment Companies Scottish dinner in Edinburgh were warned last week, a fight for the very existence of investment trusts as we know them.

We have survived the global crisis better than expected. But we should take care not to under-estimate the nature and scale of greater threats now posed to Scotland as a financial centre.