Bill Jamieson: A No vote could herald uncertainty

Tesco Bank, led by chief executive Benny Higgins, is one of several banks based in Edinburgh. Picture: Julie Bull
Tesco Bank, led by chief executive Benny Higgins, is one of several banks based in Edinburgh. Picture: Julie Bull
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Even a No vote could herald uncertainty that could see business head south across the Border, writes Bill Jamieson

PROMINENT among those whose fortunes stand to be materially affected by the independence referendum is Scotland’s finance sector. How might it cope with a new regulatory regime, uncertainties over tax and the apprehensions of customers and clients, most of whom are south of the Border?

Apprehensions will be fuelled by chilling predictions last night from the Centre for Economics and Business Research. Douglas McWilliams, its chief executive, warned that secession would trigger a mass exodus among the financial services industry. He says independence would lead to between 20,000 and 30,000 jobs – a third of employment in the sector – being moved south.

Let me say at the outset, I do not believe this grim prediction will prove true. In any event, much of the Scottish public has already switched off from such warnings where it has not become positively incentivised to defy them. And as Professor John Kay points out, no Scot is going into the voting booths to express anxieties about investment fund custodianship, pension fund actuarial deficits and corporation tax group relief.

Nevertheless, the sector is not without genuine concerns as to what the future may hold. And what I fear is not an exodus of the type described, but a silent and more insidious weakening of Scotland’s appeal as a financial centre.

A striking feature of the sector over the past decade has been its resilience. It employs 100,000 directly and the same again indirectly, accounts for 24 per cent of all UK employment in life assurance and 11 per cent of Scotland’s GVA and manages £800 billion of funds. It has survived the financial crisis that struck down the two largest companies headquartered in Scotland – RBS and HBOS – and has continued to expand and attract both functions and personnel.

The banking crisis saw a sharp brake in employment growth. According to The CityUK, numbers employed in Scottish finance (its definition includes professional services as well as finance directly) fell from just over 169,000 in 2007 to below 149,000 by 2010. However, since then there has been a marked recovery, with numbers employed now back up at 177,000.

This partly reflects the success Scotland has had in attracting large-scale investment in operations and asset servicing, pulling in big names such as Morgan Stanley, State Street, Citigroup, BlackRock, Barclays and JP Morgan. And Edinburgh has continued to be a magnet for bank headquarters – Virgin, Tesco Bank and the Green Investment Bank are based in the capital.

Little of this is going to move in a hurry. A key attraction for senior financial people in London has been, in addition to lower rental costs and the pool of skilled labour here, the quality of life that helps retain staff. How ironic that, on the same day McWilliams was warning of a mass exodus, upmarket estate agents Savills reported in London a 100 per cent increase in registrations for Scottish properties and that Scotland is now the most researched location outside London on its website. So wide is the price gap now that for the price of a £1 million two-bedroom flat in south-east London you could buy a 13th-century castle in Angus, a country house in Perthshire with salmon fishing rights or a spacious city centre penthouse in Edinburgh.

So much for the strengths. What of the vulnerabilities? No-one can deny the uncertainties that the independence referendum poses for those in finance. A recent example flowed from the decision by the EU not to relax its rules on cross-border private pension schemes. These 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. We are rather good at managing pension schemes. This skill is recognised by local authorities and public corporations as well as individuals across the UK. But this is a real problem for companies in Scotland, the majority of whose private pension customers would be resident in a separate cross-border jurisdiction on independence.

Elsewhere, many are anxious. Alliance Trust, Standard Life and BlackRock are among companies that have recently voiced concerns and/or have announced plans to transfer some operations south of the Border. While Jupiter Asset Management unveiled plans to build its presence in Edinburgh, James Clunie, the firm’s portfolio manager, declared the referendum “very scary” as companies hold back on investment. And in February, Lloyds Banking Group opted to domicile its TSB subsidiary in England rather than Scotland ahead of the new bank’s stock market float. And, as Scottish Financial Enterprise points out, after a Yes vote, the existing UK market for financial services is likely to become two separate markets for the purposes of tax and regulation and, therefore, demanding different products and associated business activities.

A major worry is how customers beyond Scotland might react. The independence white paper says the single market in financial services will remain intact. But a striking feature of the EU single market is that it has barely developed in retail financial services: those saving for retirement or through a retail savings product overwhelmingly prefer to do so with a company in their own country of residence and whose regulatory environment they know something about. In the event of independence, many rUK clients of asset managers such as Alliance or Baillie Gifford may not wish to take on the uncertainty of a separate tax and regulatory regime but opt for companies on their side of the Border. This would be a material threat to Scottish financial businesses.

Companies reluctant to say anything that could be construed as a political statement – and there are now lots of those in Scotland – are highly unlikely to proclaim that they are cutting investment or moving because of independence. It is more likely that they will quietly downsize and shift. And this, I fear, will prove to be the case not just with a Yes vote but also a close No vote, on the premise that uncertainty over Scotland’s future in the union would be likely to persist.

If a single market in financial services has not taken off across the national boundaries of the EU, why assume it would do so across the borders of a dismantled UK? That’s why there is cause to worry.