What future for financial services & consumer protection in Scotland?

Scotland has a thriving financial services sector.  We have a number of major financial corporations with headquarters or bases in Scotland, for example, the Royal Bank of Scotland, Clydesdale Bank, Standard Life, Aegon (Scottish Equitable), and Scottish Widows.

The Scottish financial services sector employs 85,000 people directly and helps support 100,000 jobs indirectly in Scotland. Its part of the lifeblood of the Scottish economy, contributing £9bn annually and representing 7% of jobs overall.

Look at any annual report for one of the large Scottish-based financial institutions and you will see by and large their customer base is global – Europe, Canada, Asia, Emerging Markets, and most importantly, the UK.

The vast bulk of their UK customers are not in Scotland. Financial institutions have a corporate responsibility to their shareholders, and a fiduciary and/or regulatory duty to act in the best interests of their customers. Pro-independence Scottish customers make up a tiny fraction of their overall customer base. The chairman of Standard Life said in the company’s annual report:

“From our base in Scotland, we serve customers throughout the UK and Europe. Our customers and shareholders benefit from the current single market for financial services in the UK and the EU, and we’re watching developments closely to identify anything that might put this at risk. Although we are strictly non-political, we won’t hesitate to ask questions and, if necessary, to speak up to ensure our stakeholders’ interests are being protected”.

Over the last few weeks there have been major developments. We now have more question marks and deep-rooted concerns over a range of issues that are core to the successful operation of Scottish-based financial institutions. A currency union has been ruled out, so besides having no clear position on what currency Scotland will use we have no lender of last resort. Given the asset value of all of Scottish financial institutions dwarfs our annual GDP or the tax take of North Sea oil, this is one Grand Canyon that cannot be papered over with bluff, bluster, or the future deliberations of a commission of experts.

The Scottish Government’s White Paper is entirely based on the now flawed assumption of a currency union; including how Scotland’s financial services industry would be able to operate seamlessly: “Financial products and services (including deposits, mortgages, and pensions) will remain denominated in the same currency. Moreover, as part of the same single market, firms will, in the main, continue to provide products and services to consumers across Scotland and the UK no matter where they are based”. (page 112).

Equally uncertain is the architecture of the regulation of financial services in Scotland. By architecture I mean more than a couple of sentences in a White Paper.  What would a new financial conduct regulator look like? We would require a Scottish prudential regulator, and a Scottish central bank, which the White Paper assumed we wouldn’t, so what’s the plan now?

What will our pension regulator and pension protection fund look like? We would need to set up a financial services compensation scheme. How would this work, and be funded? Who will fund a Scottish deposit guarantee fund? Are we going to set up a pension compensation scheme too and what will it look like? What about consumer protection? Are we going to set up a new financial services ombudsman, at what cost and who will pay?

Then there is the question of who is drafting all of the operational laws and industry rules – if a separate Scotland state is planned for 2016 – how would firms adapt to all of these rules – major new changes in UK financial regulation often take many years to implement.

While Scotland’s First Minister has no answers to all of these questions, it seems very clear to me Scotland’s financial sector would. They will relocate their headquarters to London, with the loss of Scottish jobs and the decimation of our financial sector. They would have to do so to act in the best interests of their global customers and shareholders. There is no other solution, and we have not even discussed the array of legal problems caused to Scottish financial institutions if Scotland could not join the EU within the stated period of 18 months.

Last week Lloyds has announced it will now domicile the new TSB Bank – currently incorporated in Scotland – in England. This is precisely because investors won’t invest in uncertainty over Scotland’s currency, regulatory architecture, the various guarantee funds required and the vacuum over consumer redress.

All of this is disastrous for Scottish workers, and the Scottish economy. What it demonstrates is not that Scotland could not go it alone, but that the execution of the SNP’s plans for Scottish independence have been incompetently and recklessly handled, presenting Scotland with a strategic disaster wrapped within a dog’s breakfast of unworkable policies.

But there is another emerging dimension. Given the failure of the Scottish Government to provide a Plan B on currency, or answer any of the questions I have posed above, there will come a point when independent financial advisors (IFA) on both sides of the border will be unable to recommend the purchase of Scottish based institutional products.

Why would an IFA advise on the purchase of a Scottish based financial product with such uncertainty over currency and financial regulation infrastructure, architecture, consumer protection and redress?  Safer to go for rUK based products where all of these issues are certain, and where EU rules apply without any question marks. IFAs could find themselves on the wrong end of a misselling claim or legal action if they continued to recommend Scottish products.

The failure of the Scottish Government and the First Minister to provide any Plan B, let alone a credible one that provides for certainty for Scottish financial firms means that it will not be long before they start voting with their feet; the plans must surely be being drawn up now? Firms need to start communicating these plans to their customers and prospective customers.

Mike Dailly writes in a personal capacity. He is a member of the Labour Party, Co-operative Party and Unite the Union. He has developed an understanding of financial services and consumer protection law in his roles as Principal Solicitor at Glasgow Govan Law Centre, as a Member of the Financial Conduct Authority’s Consumer Panel, and as a Non-Executive Director of the Board of the Scottish Housing Regulator.