Bill Jamieson: Resilient Scots financial sector braced for Brexit

Of all the sectors of Scotland’s economy with reason to be apprehensive over Brexit, it is financial and business services
Standard Life HQ Lothian Road, Edinburgh

Standard Life is putting in place contingency plans to relocate funds, people and operations to England if Scottish people vote for independence
Pic Neil HannaStandard Life HQ Lothian Road, Edinburgh

Standard Life is putting in place contingency plans to relocate funds, people and operations to England if Scottish people vote for independence
Pic Neil Hanna
Standard Life HQ Lothian Road, Edinburgh Standard Life is putting in place contingency plans to relocate funds, people and operations to England if Scottish people vote for independence Pic Neil Hanna

It is not just the potential rupture in cross-border deal-making and fund management, but the impact on business and investor confidence: that vital ingredient without which 
no financial centre can flourish.

Here Scotland has much at stake. There are more than 2,185 finance-related businesses, together employing more than 161,000. The sector is not one homogenous, undifferentiated mass, but a broad waterfront of distinctive specialisms with different functions, skills and dynamics. Banking alone employs 44,000 with major players such as Bank of Scotland, Lloyds, Barclays, JP Morgan, Santander, Citi and RBS.

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There is insurance (Scottish Widows, Aegon, Prudential, Aviva), with a combined payroll of 23,000; asset management (Baillie Gifford, Standard Life Aberdeen, First State, BlackRock, Kames Capital) with 7,500; asset servicing (BNY Mellon, BNP Paribas, State Street) (5,000) and a further 75,000 employed across professional and advisory services.

Even this formidable list does little justice to the most promising and fastest growing specialism of all: financial technology (fintech), with firms as varied as Nucleus, Encompass, Wallet Services, Money Dashboard and ZoneFox) embracing data capture and processing, artificial technology, cyber security, web platforms and market analytics.

Overall, Scotland’s financial sector is no Cinderella sidebar to our economic profile but a critical centrepiece, drawing on specialist skill sets and offering career opportunities for the best of Scotland’s 19 universities – with 102,000 students enrolled for business and administration courses – and 25 colleges of further education.

To all of this, Brexit has injected uncertainty and apprehension. And this, combined with growing evidence of a global economic slowdown and lacklustre growth at home, has made for a tough trading environment.

A UK-wide CBI/PwC Financial Services survey released last month recorded a fall in total business volumes in the three months to December, the first contraction since September 2013.

And sentiment among financial services has deteriorated further, rounding off three full years of flat or falling optimism.

The quarterly survey of 84 firms revealed a marked divergence in business conditions between sub-sectors, with business volumes flat or falling for banks, building societies and specialist lenders, while investment managers report the steepest fall in activity since the financial crisis.

Overall business volumes are expected to fall at a similar pace over the quarter to March, the first-time growth expectations have turned negative since December 2009.

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Said Rain Newton-Smith, CBI chief economist: “A combination of macroeconomic and Brexit uncertainty, regulatory compliance and global market volatility are taking a toll on the UK’s financial services sector. Financial services are a bellwether for the wider economy. The persistent weakness in optimism and the deterioration in expectations sound a warning for the outlook.”

Separately, the recent EY Financial Services Brexit Tracker found that heightened uncertainty had driven financial services companies to move almost £800 billion of assets to Europe. It found that since the EU referendum more than a third (36 per cent) of UK financial services companies tracked said they are considering or have confirmed relocating operations and/or staff to Europe, rising to 56 per cent amongst universal banks, investment banks and brokerages. And some 30 per cent (67 out of 222 companies tracked) have confirmed at least one relocation destination in Europe to which they are moving or considering moving or adding staff and/or operations.

Since the EU Referendum, 20 companies monitored have announced a transfer of assets out of London to Europe. Not all firms have publicly declared the value of the assets being transferred, but the Brexit Tracker has followed public announcements worth around £800bn.

What, then, has been the experience in Scotland? An investor exodus from equity funds, gruelling times for high street retail, the closure of many town centre bank branches and a daunting climate for business start-ups and expansions have added to the challenges of Brexit. But Graeme Jones, SFE’s chief executive, is adamant that the sector here is resilient and seeing new investment and expansion.

The upbeat tone is not without reservation – the effect of Brexit on the sector’s ability to attract and retain skilled labour from the EU and beyond. “We have been working,” he tells me, “with the UK and Scottish governments for the past two and a half years and have been consistent with the concerns we have expressed – and that is primarily access to talent.

“We have been growing very well just now and in staff terms growing more strongly than the City of London. But we need to maintain an adequate pipeline of talent. And for that we need to be able to recruit staff and skill sets from other countries around the world.

“Across financial services, different parts have been impacted differently. And with the fast-growing fintech sector the composition of the sector is substantially different today to what it was even in 2015. So it’s difficult to give a simplistic overview. But business growth levels in the asset management sector are still positive – and amid all the uncertainties of Brexit that is a plus factor.

“There was also business lending growth in the first half of 2018. SME and mid-cap lending has held up. But in the first quarter of this year businesses generally, have been holding off investment in the present uncertainties over Brexit. Car sales volumes, for example, are down. People across the board are holding off making investment decisions for now.

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“It’s difficult to disentangle Brexit from broader macro-economic issues such as tariff wars and China slowdown. But Scottish financial services firms have always been responsive to broader market fluctuations – we’re used to flexing our business models and adapting to change. Brexit is an overlay that exposes us to further complexity and risk and that risk has to be managed. We are used to having to do that.”

Asked about the EY UK survey and whether financial services firms are moving out of Scotland because of Brexit, he said: “I can say categorically that is not happening in Scotland. [CC1] If you are a hedge fund or investment bank, I can imagine firms may be looking at adding to subsidiary operations in Europe.

“But none of our members are looking for that. It is more likely they may be considering adding staff in continental centres locally.

“What we have seen is a movement of financial jobs into Scotland” – he cites the recent announcement of Barclays expansion in Glasgow as an example of some 2,500 jobs that have north-shored from London in recent years. And last week brought news that PwC Scotland is planning to recruit more than 100 extra staff to enhance the group’s in-house capabilities in digital technology.

“Financial services employment in Scotland grew at a faster rate in the year to July 2018 than the rest of the UK. And the fintech sector in Scotland has trebled in the past 12 months. So the pipeline of talent to which firms can have access at competitive rates of pay is a very compelling proposition for firms.

“We are relentlessly focused on growth,” he insists, “whether it is hard Brexit, soft Brexit or something in between.”

And to back this up, SFE has just launched a prestigious 19-page guide setting out the scope, the skills and the success of the sector – a veritable armoury of statistical munitions. These may be tough times for finance, but it is braced to prevail – whatever Brexit may throw at it.