Scottish independence: ‘Silent attrition’ the fear

From left, panellists George Renouf, Bill Jamieson, Haig Bathgate and chairman Peter Jones. Picture: Esme Allen

WEALTH is highly unlikely to leave Scotland in a stampede in the event of independence, but there is a danger of a slow, almost imperceptible drift of capital to the south.

That was the general view at The Scotsman Conferences/Turcan Connell referendum breakfast on wealth management. Commentator Bill Jamieson likened Scotland’s financial services industry to Tennessee Williams’s The Glass Menagerie – precious, but vulnerable to breakage.

Haig Bathgate, chief investment officer with Turcan Connell Asset Management, said individuals might choose to move their money out of Scotland, but added: “If the transition is managed well, there shouldn’t be a stampede.”

However, Bathgate said a lack of clarity in key areas – including currency, debt, regulation, tax and tax breaks – had created huge uncertainty for the wealth management community and its customers ahead of the referendum.

This uncertainty had not yet created any significant volatility in UK markets – which might have been expected given that the referendum is followed by UK and Scottish elections in 2015 and 2016, plus a possible European Union referendum in 2017 – but Bathgate thought it may start to weigh on assets this year and could lead to declines in gilts and sterling.

He suggested that pragmatism would kick in if there was a Yes vote, as both sides would have to consider the best future option on big issues such as currency, debt and regulation.

He commented: “The pound has become a political football, but pragmatism will prevail.”

An independent Scotland’s debt rating would depend on how existing UK debt was shared out, Bathgate said, but on balance, a new country would be likely to end up with slightly higher interest rates. However, pragmatism would probably force rates back closer to UK rates to “maintain stable capital flows”, and he did not foresee a “Doomsday scenario” on debt rating.

On regulation, Bathgate said there was a real lack of clarity, and noted the “potential for conflict” with London. EU membership demanded a separate regulatory framework and there was no precedent for a shared regulator, he told delegates.

Another challenge was the level of compensation schemes on offer from an independent regulator – this is unlikely to be at the same level as the existing UK scheme. The liabilities of banks was around 12 times Scottish GDP, compared to nine times in Iceland and five times in the UK, Bathgate noted.

On tax, he thought rates would diverge and that there was significant uncertainty around personal savings and pensions – though the promise of lower business taxes could offset increased costs from higher borrowing rates in an independent Scotland.

Bathgate said he thought capital controls to prevent the flight of wealth from Scotland in the event of independence were “highly unlikely” given the Scottish Government’s “faith in a currency union and shared regulator”.

Event chairman Peter Jones suggested capital controls would be outside the legislative competence of the Scottish Government until reserved powers were fully transferred – which is expected to happen in March 2016. However, all the panellists felt this was a very short timescale to resolve a wide range of complex issues.

There were also warnings about the huge reach of Scotland’s financial services sector, with Standard Life, for example, having 90 per cent of its clients outside Scotland.

Jamieson said: “It’s not just our financial services industry we have to comfort about independence, but also the huge customer base outside Scotland.”

The EU decision not to relax rules on cross-border pension schemes was a particular concern, he warned, as an independent Scotland would effectively be a foreign country in relation to the rest of the UK.

Jamieson dismissed claims by Douglas McWilliams of the Centre for Economic and Business Research, who had said that independence could see Scotland lose 20,000-30,000 financial services jobs. He said: “Scotland has been very successful in pulling in major players like BlackRock, State Street and Morgan Stanley and has shown striking resilience in the face of the financial crisis.”

He also stressed that it was not just low overheads and costs which brought these firms north of the Border, but also skilled labour and huge quality of life benefits for “stressed and over-burdened financial services staff”.

He argued: “The prospect of independence will not trigger a sudden exodus but it would be wrong to gloss over the potentially corrosive effects of uncertainty of a Yes or a close No vote. My fear is not mass exodus, but a pernicious, steady, silent attrition.”