THE play that propelled Tennessee Williams to fame was The Glass Menagerie. Its title has puzzled for generations. The cabinet collection of a young girl’s glass animals seemed little more than a stage prop: always there, but the drama hardly seemed to involve them much. This fragility was the prism through which we viewed the rough and brittle world of Williams’ characters.
Scotland, too, has its Glass Menagerie and last week it shook. Carry on like this, and something is sure to break. Scotland’s financial sector will not much care to be likened to a menagerie. But diversity is one of its characteristics. And no matter how passive the animals may seem or how sturdy the cabinet, this is a fragile collection, and like the world around it, vulnerable to breakage.
Last week saw the pensions industry hit by a European Union decision not to relax the rules on private sector, cross-border pension schemes. An arcane and rarefied sub-sector of Scotland’s economy, you may feel. But it has been shaken by a surprise step to stick with the current regulatory regime.
This is a blow to the Scottish Government, which had been hoping for simplification ahead of the independence referendum, for a Yes vote would render all private sector schemes managed by Scottish firms for companies and public sector bodies in the rest of the UK “cross-border” for the purposes of regulation – and difficult and costly to administer.
The rules require such schemes to be fully funded at all times and to be subject to annual rather than triennial valuations: a requirement that adds materially both to regulatory burden and cost.
English-based pension providers such as Legal & General and the Prudential will now have to rethink whether (and how) to continue with managing such schemes for Scottish firms. And for Scotland, which has been rather good at private sector scheme management, this is a blow to the likes of Standard Life, Scottish Widows and others.
The adverse effect of the European ruling could be seen in the share price reactions last Friday. Standard Life dropped 1.6 per cent; the Prudential lost 2 per cent, Aviva 3 per cent and Legal & General 4 per cent. Yet another big uncertainty has been injected, at a time when the industry already has enough to cope with.
Last week Scottish Financial Enterprise, the umbrella lobby group for the sector, released a briefing paper on the implications of the independence referendum for the industry. This 16-page document makes for distinctly uncomfortable reading. Sir George Mathewson, former head of RBS and a keen SNP supporter, has already broken ranks to point to the potentially positive effects of a more favourable fiscal regime that could help the industry and promote more competition in the event of independence.
That might well be the case. The SFE stresses it is politically neutral, it has taken no view either way on the independence issue, and that it has consulted widely. Its chief concern is with the many uncertainties and imponderables the referendum has thrown up and the immediate practical difficulties the sector is likely to face in its forward planning. As such it is hard to argue with, and indeed, it is its concern over the practicalities that makes the detail in this document compelling.
Of particular interest are the sections covering the nature and degree of EU oversight on any arrangements reached over the currency and the establishment of a new and untried regulatory regime.
On the currency question, it notes the warning that if the rest of the UK is not willing to agree a currency union, the Scottish Government would not accept a share of UK debt. If this survives into any negotiation process, or indeed into any actual government policy in an independent Scotland, “this will be noted by potential lenders in the money markets and may lead to increased borrowing costs.
“It is also clear that outstanding international disputes would complicate or even block EU entry negotiations and it seems likely that such negotiations could only begin once intra-UK disagreements, following a Yes vote, had been resolved.”
Talks over a Scotland/rUK currency union, it adds, would in any case be needed with EU authorities, since the EU would be expected under this scenario to embrace two currency unions within its borders and governance arrangements would need to comply with the EU treaties.
A particular concern of the paper is that the operation of a single market in the EU for financial services is not as evident or as easy as the rhetoric makes out. The Scottish Government’s White Paper claim that “as part of the EU single market firms will, in the main, continue to provide products and services to consumers across Scotland and the UK no matter where they are based” is, it warns “a serious understatement of the nature of the change to the UK market that independence would bring, particularly over time”. Not only is the EU single market incomplete, but few financial services, particularly of a retail nature, are sold across borders. People do not, as a rule, buy a pension or savings plan from providers not regulated in their home jurisdiction. A new double taxation treaty would also be needed between Scotland and rUK.
Some argue that Scotland’s competitiveness could be improved if the financial services industry was actually made smaller, as suggested by the ratings agency Standard and Poor’s. The contingent liability that the industry constitutes in relation to Scotland’s GDP could be addressed by re-domicile to the rest of the UK. “The notion that the loss of large parts of our industry”, the SFE paper tartly observes, “would be seen as a positive step in an independent Scotland illustrates, again, the difficulty of predicting the policy conclusions that might be reached, once decisions are made on the basis that Scotland and rUK are separate political entities with separate interests”.
By sticking to immediate issues of practicality and the host of uncertainties now crowding in on Scotland’s financial sector, the paper performs a necessary public service and one that should not be obscured by political considerations. Financial services are acutely sensitive to changes in public confidence and perceptions of regulatory turbulence. It is Scotland’s Glass Menagerie. And we shake it at our peril. «