How Scottish independence would hit UK investors

The referendum on Scottish independence is set to take place on 18 September 2014 and while only over-16s living in Scotland get to vote, the implications will be far ranging for the rest of the UK too.

This is largely because of the size of the Scottish financial services sector.

An independent Scotland would have banking assets worth over 12 times the size of its own economy, which could mean big risks in the face of another financial crisis.

To put this into perspective, Scotland's position is proportionally far larger than the banking assets relative to GDP in Cyprus (seven times), Iceland (over eight times) and Ireland (almost nine times) prior to their financial collapses.

UK issue

These assets are not all held by Scots either; figures from HM Treasury in the table show just how many financial products investors and savers outside Scotland hold with Scottish institutions.

To have your say on whether the prospect of Scottish independence will make you re-evaluate your investments in Scottish firms and the funds that invest in them, vote in our poll.

Meanwhile, Scottish Government figures show Scottish businesses sell more to the rest of the UK than to the rest of the world combined, and 185,000 people's jobs depend on the financial sector in Scotland.

Finding a way for the financial sector to continue working to such scale in an independent Scotland is a major task and it is not altogether clear whether it will be an achievable one.

The Scottish Government's First Minister Alex Salmond has today unveiled the Referendum White Paper, which he termed a "mission statement for the future".

For the opposition (pro-union) campaigners, Salmond and his Scottish National Party have failed to address key questions on how the Scottish economy and Scottish businesses will operate if the public vote "yes".

One such campaign, Better Together, is led by former Chancellor of the UK, Alistair Darling.

He says: "There is nothing in today that we didn't know yesterday - they have ducked the big questions, like what is plan B on the pound."

Probably one of the most pressing considerations should Scotland become independent is which currency the country uses.

If a decision is made to create a separate currency this could have a massive knock-on effect on savers and investors because it would most likely mean having a distinct monetary policy, and therefore Scotland setting its own base rate.

Currency considerations

Although Salmond said on Tuesday that Scotland would stick with using the pound, he has no way of knowing it. Only in the event of a "yes" vote will negotiations begin with Westminster on such issues.

If Scotland decides to opt for its own currency and own monetary policy committee, terms for Scottish investments and financial products could be vastly different to those in England and Wales.

This is because the base rate informs the interest rates of many products. So, in the case of inflation-linked products - such as floating mortgages - different policies would have to be designed for residents in Scotland and residents outside Scotland, instead of being linked to the same base rate or inflation rate as they are today.

For companies who trade in such products this could be a very big problem indeed, according to the Treasury.

Insurance policies, for example, are designed to dovetail with and supplement the legal, regulatory and welfare systems of a state. This means that, currently, insurance products can be sold across the whole UK.

However, in the event of Scottish independence, where differences may emerge in legal and regulatory frameworks, this could require different products and potentially additional costs.

When it comes to mortgages, it is rare for them to be sold across borders because of complications of operating across the differing tax, regulatory and legal systems of different states.

Which stocks and sectors will it hurt?

The impact of this would be most obviously felt by financial firms such as Royal Bank of Scotland and Standard Life, which are headquartered in Scotland and sell the vast majority of their products outside the country.

Lloyds Banking Group, through its ownership of the Bank of Scotland will also face substantial challenges, while asset manager Aberdeen Asset Management is unlikely to escape unscathed, particularly if its deal to buy Scottish Widows Investment Partnership from Lloyds goes through.

I don't believe [industry] influence would be possible if Scotland was independent."Jim Milne

These firms could potentially lose a large part of their customer base, or could alternatively choose a wholesale move of their operations to England.

Either way, it spells a lot of upheaval for investors with shares in these institutions.

The oil and gas sector faces uncertainty too since Salmond has based a lot of his projections of Scottish wealth on continued production of North Sea Oil.

He has announced he would set up an oil wealth fund and take control of 90% of all current assets in the UK North Sea if Scotland becomes an independent nation, according to oil and gas analyst at VSA Capital Malcolm Graham-Wood.

Jim Milne, chairman and managing director of offshore engineer Balmoral Group Holdings, says: "As part of the UK we are optimally placed to maximise the potential of the North Sea for years to come. Not only is it imperative for the wider economy to be able to manage the revenues derived from the North Sea, but economies of scale mean that tax breaks and decommissioning relief worth billions are attracing new investment into the province.

"Our industry is achieving this as part of the UK. I don't believe such a level of influence would be possible if Scotland was independent."

No guarantees

Another area of grave concern is whether or not the Financial Services Compensation Scheme (FSCS) would still exist for those living in Scotland, or for those living outside Scotland who hold savings and investments in Scottish companies.

A Scottish government spokesperson says: "Following a vote for independence in 2014, Scotland will remain part of the UK while the terms of independence are negotiated.

"The FSCS is funded by the financial services industry and customers in both Scotland and the rest of the UK would remain protected.

"The Scottish Government would ensure that arrangements for an effective compensation scheme are in place, mirroring the level of protection provided in the UK FSCS, and in line with European harmonised levels of consumer protection," he concludes.

Owen Kelly, chief executive of Scottish Financial Enterprise (SFE), which represents Scotland's financial services industry is not so convinced.

"As far as we know, little work has been done on whether or how the FSCS could continue to cover Scottish depositors or savers or, indeed, how or whether a Scottish scheme could cover non-Scottish depositors or savers," says Kelly.

He thinks it is worthwhile keeping an eye on how the EU resolves these matters with regards to a pan-European deposit guarantee.

Kelly also says the pro-independence argument that the Financial Conduct Authority and Prudential Regulation Authority could continue to cover Scotland even after independence is problematic.

Kelly stresses the SFE is not politically motivated, but needs to understand how independence could affect its members.

Unanswered questions

Kelly says there are five key questions surrounding independence most relevant for investors and savers: What currency could be used? Under what terms could Scotland be a member of the EU? What will be the effects of independence on what is currently a wholly single market for the financial services in the UK? How long would a transition to independence take and how would the process be managed? And what would be the requirements for financial regulation?

The scariest part for those living south of the border is that they will have no say in whether Scotland splits from the UK or not, and no input into the answers of these questions, which in most cases will not be decided upon until after the referendum.