An Independent Scotland
The Scottish Independence Referendum takes place on Thursday 18th September and within a few days after, we will know whether the system of financial regulation in Scotland is to remain the same or will be split from the rest of the United Kingdom.
Currently the framework and regulation of UK financial services is derived from UK Statute, Statutory Instruments, UK case law, from EU Directives and Regulations (which become UK law) and case law from the European Court.
To make the Single Market for Financial Services work each member state must have its own regulator, implement and ensure compliance with EU Directives and regulations and have a consumer compensation scheme for financial services.
If the people of Scotland vote for independence, the new Scottish Government would need to establish its own central bank and regulator. Based on the views expressed by politicians south of the border, the Pound will not be shared. In addition, the EU Commission has made it clear that Scotland would need to qualify as a member state in its own right. A process that would take a minimum of 2 years, assuming that no EU member state objected and Scotland could meet the conditions.
In the UK, following the 2008 Financial Crisis the Government created the Prudential Regulatory Authority (PRA) to oversee systemically significant institutions and the Financial Conduct Authority (FCA) which carries out conduct supervision and prudential supervision of firms not overseen by the PRA. There are other significant regulatory bodies; the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).
As most of those working in these organisations are located outside Scotland, a new Scottish Government would face significant challenges in terms of establishing its own regulatory structure and recruiting quality staff and financing a new regulatory structure.
An additional problem is supervising Scottish banks and financial institutions that carry out significant business in England. At outset, unless there is a fudge, Scotland will not be a member of the EU so firms based in Scotland will not be eligible to operate under the passporting provisions in the Single Market. A Scottish regulator will not have any jurisdiction in the rest of the UK and the FCA and PRA will not be able to supervise in Scotland.
It is likely that firms based in Scotland will need to seek authorisation from FCA (and where appropriate from PRA) to operate in the UK. Similarly, it is likely that firms located in the UK will need to seek authorisation from the Scottish regulator to do business in Scotland. Firms in the rump of the UK are likely to consider carefully whether or not there are commercial benefits in complying with two regulators.
For customers seeking to save or invest and for any professional firm advising them, there will be a dilemma. If the Scottish voters vote “Yes” to Independence, the new financial services supervision and compensation scheme will need to be created. The transitional period is likely to be drawn out over two years, meaning a period of uncertainty regarding investor protection. Will investors, their advisers and financial services firms feel comfortable doing business in Scotland during the uncertainty of a two year transition? Thereafter, will they have confidence in a fledgling regulator and an untested compensation scheme?
We will know the result of the Scottish Independence Referendum in the next two weeks. Firms and their customers will then need to assess the implications and may need to plan for a very different future.