In or out of the EU, part of the UK or independent – banks in Scotland need to know where they stand, writes Scott Macnab
Scotland’s long and proud history as a global centre for banking and finance has survived many an economic earthquake throughout the centuries. It was Scotland which effectively invented the life insurance industry back in the 1740s when two clergymen, Wallace and Webster, set up the Scottish Ministers Widows Fund. More than a century later the Investment Trust movement was pioneered by a Scotsman, Robert Fleming of Dundee (although most people will be more familiar with his grandson, Ian, the James Bond creator).
Edinburgh is now the UK’s key financial hub outside London and has emerged wounded but resilient from the banking crash of 2008 which threatened many major institutions when taxpayer funded bailouts saved Royal Bank of Scotland and Lloyds Banking Group, owner of Bank of Scotland. But the Brexit vote has cast fresh concerns over the future of the sector with fears that other European Union centres, such as Paris or Frankfurt, could steal London’s crown as Europe’s finance capital – with knock-on effects for Scotland.
As the oil industry crisis continues to bite, the importance of firms like RBS, Lloyds, Clydesdale, Standard Life and Scottish Widows, as well as investment giants like Baillie Gifford and Aberdeen Asset Management, which help make up the financial services sector in Scotland will be become an increasingly crucial driver of economic growth.
It currently employes almost 100,000 people directly and the same again indirectly – already more than the oil industry. It is responsible for more than 8 per cent of Scotland’s GDP, generating about £8 billion for the economy.
But the UK’s decision to leave the EU has plunged the sector into uncertainty. The turbulent aftermath saw billions of pounds wiped off the value of stock markets giants in the week after the vote. Although the situation rallied for Ftse 100 firms, the pound has continues to dive against the dollar and the euro.
And against this backdrop, French prime minister Manuel Valls says he is now developing a strategy to make Paris an attractive hub for financial services giants and other firms. Online adverts proclaiming “Welcome to the Paris region” were running in the Financial Times and Wall Street Journal soon after the Brexit vote. Officials in the French capital’s financial district have reportedly been preparing for months to promote their sector and been targeting London-based banks.
The pressure was really cranked up when French president François Hollande warned that London would be blocked from the highly lucrative trade in clearing euro-denominated derivatives after Brexit. The competition London will face from Frankfurt stems from its status as the financial capital of Europe’s biggest economy – and the home of the European Central Bank (ECB).
Britain’s biggest bank, HSBC, had previously indicated that it could move up to 1,000 jobs out of the UK to Paris in the event of a Brexit vote. But its Glaswegian chairman Douglas Flint was quick to play down the prospect of a UK exodus in financial services after the Brexit vote, pointing to the huge volumes of US dollars and Chinese yuan renminbi traded in London every day which have nothing to do with the UK’s place in the single market.
“Politicians cannot dictate where things are done,” he told a conference of industry leaders last week.
The hope for the UK sector is that this pragmatic approach will prevail in the forthcoming negotiations to repeal the UK’s membership of the Brussels bloc. And this is an area which Nicola Sturgeon must surely focus her energies in her current breakneck round of shuttle diplomacy with European leaders, consuls-general, MEPs and officials. The First Minister’s priority is an accommodation which could somehow secure Scotland’s place in the EU. But she must prepare for the worst, including a scenario outside the EU and the potential impact on one of Scotland’s most important industries.
The biggest concern facing Scots finance houses is an end to the “passporting” arrangement which allows them to provide services throughout the EU as long as they are operating form a UK base. Goldman Sachs and JP Morgan are among the institutions which have warned of the importance of the UK’s membership of the EU in securing such an arrangement, which means global firms that establish a UK subsidiary can trade EU-wide.
There are also major questions over regulations and the legal framework, which is notoriously cumbersome. For many this was the great benefit of leaving the EU, but if banks want to trade freely across the EU to what extent will they have to meet these? And the UK’s future relationship after Brexit will be pivotal for financial services. To gain access to the single market, as most want, would mean a Norwegian-style free trade agreement as a member of the European Free Trade Association or the European Economic Area. Switzerland has more than 100 bilateral agreements, but none provide full access to the single market.
But are such issues a priority for Ms Sturgeon? She wants Scotland to remain in the EU. If no such accommodation can be reached then a second independence referendum is already being prepared for.
Whatever side of the constitutional debate you sit, this is the nightmare scenario for the banking sector. If current SNP policy holds, Ms Sturgeon is proposing an independent Scotland in the EU – but sharing the currency and central bank of a Brexit UK which would leave. Would a Brexit-supporting UK prime minister back such a scenario? Never.
And just as we saw in the final days before the Scottish independence referendum in 2014, our biggest banks would likely revive plans to relocate their headquarters elsewhere. It will certainly instigate another tsunami for our centuries old banking system and who knows how it would emerge.