Capital flight is the tocsin of economic order. It drains private savings, it ruins the reserves of banks and plunders the coffers of government. Once started, it can be difficult to halt without a forceful intervention by government or the central bank.
It is an outcome countries should take every precaution to avoid. But today, even before the outcome of the independence referendum on 18 September, bank depositors, companies and investors in Scotland are making preparations for just such an exodus.
Until two weeks ago, most fund managers and investors in Scottish financial institutions had assumed there would be a No vote to continue the union and thus little need to be concerned at a break-up of the UK.
All that has now changed dramatically. The outcome of the vote is on a knife-edge. And the financial sector is braced for a flight of savings and capital. Already major firms including Standard Life have made arrangements for the registration of client assets to be located in England. Few investors bothered when Douglas Flint, the chairman of HSBC, warned last month that Scottish independence could prompt capital flight from the country and leave its financial system in a “parlous state”.
What is it that Scottish savers and investors have to fear? Are these fears rational? And what precautions, if any at this stage, should investors take?
The fear is not of independence per se. The immediate apprehension is of an unavoidable and prolonged period of uncertainty ahead in the event of a Yes vote as negotiations on separation get underway. These will be necessarily lengthy and complex. Few believe they will be completed by the Scottish Government’s mooted deadline of 24 March 2016. This alone will erode business and investor confidence.
Of immediate concern for savers is uncertainty over the continuation in Scotland of the Financial Services Compensation Scheme (FSCS). This protects savings up to £85,000 in the event of a banking crisis of loss of confidence. The Bank of England will need to reassure depositors in Scottish banks quickly if a snowballing withdrawal of funds is to be avoided.
Uncertainty over Scotland’s currency has dominated the campaign. This issue will be of major concern to long term savers and those who have pension savings in Scottish institutions. In what currency will their savings be denominated? And if “sterlingisation” is the option taken, can devaluation be avoided?
These concerns were easy to dismiss in the heat of a raucous political campaign. They will now snap very sharply into focus. Pensions expert Douglas Baillie told The Economist last week that if Scotland votes to leave, the flow of pension money into Scottish-based insurance companies from outside Scotland may well dry up. And there would be transfers out, to English-based companies.
“They will run for cover, to a safe haven,” he says. Owen Kelly, the chief executive of Scottish Financial Enterprise, tells of “companies making contingency plans where possible” and that “in some cases this may involve reconfiguring asset allocations. This is prudent risk management.”
It is almost certain that the pound will take a hit – a fall of between 5 and 10 per cent has been mooted, and gilt-edged government stocks will also be adversely affected. Shares in Scottish registered companies and those with substantial cross-Border operations will also suffer. While this should be short-lived, significant doubts will persist over the extra costs and complexities of cross-Border business.
Finally, and arguably most troubling of all, is how an independent Scottish Government will cope with its budget deficit and deliver on the many spending promises made during the campaign.
Most savers and investors with Scottish financial institutions or whose affairs are looked after by Scottish based-independent financial advisers should have no immediate cause for worry: their assets will already be registered outside Scotland or are in the process of being transferred. But it is well worth checking with your IFA.
Shares in quoted companies such as Standard Life, Alliance Trust and Aberdeen Asset Management will suffer from a perception that future business growth could be hit.
Much will need to be said and done over the next ten days to steady nerves and to cauterise the risk of a capital exodus. But there is no doubt that one is already gathering pace and that politicians may have left it too late to rally Scottish investor confidence and avoid a crippling blow to the Scottish financial sector. Even as matters stand, it faces a most turbulent and debilitating period ahead.