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What are the potential implications of Scottish independence on the financial services sector in Scotland? Rod MacLeod and Hamish Patrick of Tods Murray LLP consider the issues and say a change in currency--assuming agreement couldn't be reached on currency union--would have profound implications.
How could your financial services practice area be affected by an independent Scotland?
As financial services lawyers we advise a wide and diverse array of financial services firms and other institutions operating in Scotland. An independent Scotland would mean, among other things, a separate financial services regulator due to EU rules and consequently a separate regulatory system in Scotland. While one would expect a Scottish government to adopt wholesale UK financial services regulations and legislation at the outset of independence, independence would require Scottish and rUK (rest of UK) financial service firms, institutions and businesses to adapt to the new regulatory and business environment.
What cross-border issues, laws, regulators and courts currently affect your practice area?
The majority of cross-border transactions that we work on are subject to a combination of Scots and English law depending on the jurisdiction of the entities involved and the location of relevant assets and rights. While we would expect the type of Scots law that we advise in our practice area (eg Scottish finance contracts, security and trusts) to be largely unaffected by independence--thanks to the separate legal systems north and south of the border--we would expect there would also be increased ongoing work for Scottish law firms in relation to law that currently operates on a 'UK' basis (such as tax and certain regulatory laws), where UK-wide businesses may currently seek advice only in England.
How long would it take Scotland to put a financial services regulator in place?
While an independent Scotland would need its own financial services regulator due to EU rules, if it could negotiate a currency union and/or agree to share the services of systemically important UK institutions such as the Bank of England then, in theory, bodies such as the Financial Conduct Authority (FCA) could operate in Scotland 'under a different hat', answering directly to the Scottish government on regulation in Scotland. Although this would require a significant amount of internal restructuring within an organisation such as the FCA, we believe such arrangements could be achieved within the 18-month period that the Scottish gov-ernment has set for independence if there is a Yes vote on 18 September 2014.
However, given the UK government's and Westminster political parties' well-publicised opposition, currency union and the sharing of institutions like the Bank of England would seem unlikely (although by no means dead and buried) in which case the Scottish government would need to establish a new Scottish regulatory body which would at least benefit the Scottish financial services sector by being more conveniently based in Scotland rather than in London.
We think that in a best-case scenario, it should be possible to establish a new financial services regulator in Scotland within 18 months. However, the challenge for the Scottish government would be three-fold:
What structure will the financial services regulatory regime take?
As noted above, we would expect the Scottish government to adopt wholesale UK financial services regula-tions and legislation at the outset of independence as it simply wouldn't have the time or the resources to reinvent the regulatory wheel. There would no doubt be some divergence between the Scottish and rUK reg-ulatory systems over time, given different policies and objectives of the respective governments--although we would hope that the regulators in both jurisdictions would work together to harmonise the regulatory systems given the interconnectedness of the financial services sectors in Scotland and rUK.
How does the regulator propose to recruit staff with the skills necessary to effec-tively supervise the Scottish financial services sector?
As noted above, this would be one of the main challenges for any new Scottish regulator given that the ma-jority of UK financial services regulation and regulatory professionals operate from or are based in London. We would expect that the Scottish government would need to invest heavily in attracting senior staff both from London and abroad but also within the Scottish sector, in particular from the private sector. While mov-ing to a smaller jurisdiction could be seen as a backward career-step for some, others might see great potential in the opportunity to take part in establishing a new regulatory system and regulator.
What are your key concerns as the referendum draws near?
We have three key concerns:
Damage to business caused by the 'uncertainty effect' of independence (ie uncertainty on currency, EU membership and uncertainty over how long it would take to transition to independence). We have seen a marked increase of provisions in finance contracts involving Scottish parties or collateral that use independ-ence (rather than a change of currency) as a trigger event for break clauses, renegotiating the contract and, in one instance, removing Scottish collateral from a wider collateral pool. While in some cases it's only pru-dent for lenders and investors to take precautionary measures to protect their position should the constitu-tional, economic and financial landscape shift on 18 September 2014, there's no doubt that the uncertainty on currency and EU membership and other big issues is putting some players off the market in Scotland until these issues are resolved.
That depositors with Scottish accounts will seek to move their deposits south of the border, regardless of whether Scotland retains sterling or issues a new currency due to a lack of currency certainty or a lack of confidence, justified or not, in the new regulatory environment.
Higher compliance costs for firms and businesses operating in Scotland and rUK which would find them-selves operating in two separate regulatory systems rather than one. As noted above, we would hope that this would be mitigated by Scotland adopting and operating UK regulations and mirroring the UK regulatory system at the outset of independence and that the regulators would work closely together to harmonise both systems but we would envisage a rise in compliance costs for FS firms nonetheless.
Are you taking any practical steps ahead of the referendum?
In addition to producing e-bulletins for clients and briefing papers on these and related issues, we have set up an independence blog for clients to view materials, links to press articles and video interviews and semi-nars that we have presented on independence issues.
We are also delivering seminars and presentations on the impact of independence on financial services for a number of financial institutions and advisers in London in the run-up to the referendum in September.
Do you think there are any issues that haven't received enough attention or consideration?
If Scotland hasn't concluded negotiations on EU membership prior to independence (bearing in mind that the Scottish government has set a target date at the end of 18 months following any Yes vote in September 2014) then it would need to agree interim reciprocal arrangements with the EU for the free movement of goods, services and workers etc (including 'passporting' for regulated financial firms) to allow financial ser-vices firms and institutions to continue operating in rUK and the EU (and vice versa).
While we wouldn't expect any opposition to such reciprocal arrangements from the EU, such arrangements would rely on Scotland having a competent and credible financial services regulator in place and it would be interesting to see what impact this would have on the timescales for EU membership negotiations if a new regulatory system and regulator were not established at the outset of those negotiations.
What would a Yes vote mean in practice for lawyers in your field?
We would expect there to be a significant increase of one-off work for Scottish law firms (and indeed those in the south) resulting from the transition to independence. We would also expect there to be a significant increase in demand among law firms for regulatory and tax lawyers specialising in the new Scottish tax and regulatory systems.
What would a Yes vote mean in practice for clients in your field?
While independence might present a number of opportunities for some of our clients, for example, some might take advantage of tax benefits or reliefs proposed by the Scottish government, many of our clients would be faced with higher business costs, at least in the short-term.
Financial service firms operating in Scotland would need to adjust to the new regulatory and tax environment and engage professional advisers for assistance in order to better understand the impact of independence on their business and operations. While some firms are putting together contingency plans for independence, the cost involved for work that ultimately may not be required post-18 September 2014 means that a lot of firms are waiting to see which way the vote goes before incurring significant expense. The number of variables such as currency and EU membership, that can't be decided until negotiations following a Yes vote, only adds to the uncertainty and impedes forward planning for independence.
A change in currency--assuming agreement couldn't be reached on currency union--would also have pro-found implications. The financial services sector in Scotland would have to participate in an overhaul of IT systems and bank payment infrastructure in Scotland in order to accommodate the new currency and there would inevitably be higher transaction costs for cross-border deals with rUK in the short-term due to ex-change rate risk, currency conversion costs and price comparability issues. This would present a significant challenge for some of our clients given that about 90% of the Scottish financial services sector's business comes from south of the border, although we would expect an independent Scotland to continue using ster-ling without formal monetary union with rUK for an interim period ahead of any change in currency rather than introducing a new currency on day one of independence.
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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