This is because many important aspects of how a hypothetical independent Scotland would function depend on the outcome of negotiations with the UK, the EU and other authorities. These negotiations, on matters such as the continued use of sterling as a currency, the terms of EU membership and the division of the national debt, can only begin after a ‘yes’ vote.
Moreover, the decisions of a newly independent Scottish polity cannot be foreseen at this stage. We cannot know now who would be in government in an independent Scotland and we cannot know the policy context in which it would be seeking voter approval for its policies. Indeed, we cannot know now what the constitution of an independent Scotland would be – the proof of the independence pudding will not only be in the eating but also in the selection and mixing of the ingredients.
That is not to say we know nothing – there are some things about becoming a nation state that are necessary and simply part and parcel of being one. But where there is political choice and discretion, knowledge and certainty will elude us until the decision to become independent has been taken and, indeed, for some time afterwards.
The Scottish government has published extensively on independence and explained how things might function under the flag of independence, across a wide range of areas. But they cannot, for the reasons outlined above, provide definitive guidance.
We can know some things about how authorities and frameworks outside Scotland will continue, and what that means for the provision of financial services in an independent Scotland. For example, we know what the FCA rules are on the authorisation of operations of foreign companies in the UK and there are no reasons to think Scottish companies, if Scotland becomes a separate country, would be treated any differently from, say, Irish or French ones; and we know what the EU rules are on investor protection schemes. This gives us some guide to the predictable consequences of independence for our industry and its customers, since we can see how other ‘foreign’ companies comply with FCA rules and we can see what sort of investor protection scheme would be required in an independent Scotland.
We have identified five principal issues for the industry:
1. EU membership
Most commentators accept that an offer of EU membership seems highly likely, albeit unlikely with the same opt-outs as those currently held by the UK. Therefore, ahead of the referendum, the terms of membership and, indeed, whether the Scottish people would support EU membership on any terms, must remain unknown. Key areas of negotiation for the financial services industry include currency and central bank arrangements; compatibility of intra-UK arrangements with EU single market rules; and how to comply with regulatory and customer protection requirements.
2. Currency
The main options are known - sterling as part of a monetary union with the rest of the UK, sterling without such a union (‘dollarisation’), a new Scottish currency, or the euro. The pro-independence Scottish government favour monetary union with the rest of the UK, and they believe that such a union would be in the interests of the rest of the UK, as well. UK political figures opposed to independence, notably the three people most likely to be faced with the question of whether to agree to a currency union with a newly independent Scotland if it ever came to that – Ed Balls, George Osborne and Danny Alexander – have all said they think it unlikely or very unlikely.
Impartial, expert commentary, including analysis by the FT’s own columnists Martin Wolf and John Kay, suggests that a currency union is an unlikely outcome. Certainly there are big practical problems for a currency with more than one line of political accountability, as the eurozone has shown and have been highlighted by the governor of the Bank of England Mark Carney, in his recent speech. But the eurozone looks like it will come through, simply because of the robust, collective political will that underpins it. An early move in the debate about a UK/Scotland currency union has been for the Scottish government to threaten that Scotland would refuse to accept a share of UK debt if the rest of the UK does not agree to such a union. If that is how the discussion continues, leading to reluctant or grudging participation on either side, a similarly strong collective political will may prove elusive.
3. Regulation
We do know that there will have to be a separate Scottish financial regulator, although we cannot know how it will be configured. It is an EU requirement and a basic element of state apparatus. We can know now that this new regulator will be additional to the one we already have, since most of the customers of our industry in Scotland are in, and will remain in, the rest of the UK. We will still need to be regulated there if we are to continue to serve them.
4. UK single market
For centuries there has been a single UK market for trade and finance. This enables Scottish-based organisations to sell products and services into a market that is about 10 times the size of the Scottish market, without any barriers. An independent Scotland would necessarily become a new and separate jurisdiction for taxation and regulatory purposes. Since financial products and services are tailored to tax, consumer protection and regulatory regimes, different ones would be needed for the two jurisdictions of Scotland and the rest of the UK.
5. Transition period
A period of uncertainty following a vote for independence is inevitable, while negotiations with the EU and the UK government take place and new constitutional and currency arrangements are agreed. During this period of uncertainty, business activity and the need to serve customers will continue and standards will need to be maintained if we are not to lose out to the competition, who will not be facing the same challenge.
So taking a dispassionate and pragmatic look at it, a ‘yes’ vote would have a pretty significant impact on the industry. It will have to reconfigure to deal with the changed regulatory and market landscape, as it has done before when political change has made that necessary. Things cannot simply stay the same, for the reasons outlined above.
Owen Kelly is chief executive of Scottish Financial Enterprise, the representative body for financial services in Scotland
Key Points
Some of the most important questions about the financial consequences of Scottish independence cannot yet be known.
The weight of expert opinion would suggest that a currency union is an unlikely outcome.
An independent Scotland will need an separate Scottish financial regulator.
