Yahoo Finance Booming Scottish finance industry wrestles with rising prospect of ‘Scexit’
Still reeling from the uncertainty surrounding Brexit, bankers and investors in Scotland are now facing the prospect of ‘Scexit’ – a split from the UK – following the Scottish National Party’s fourth victory in the Holyrood elections.
In a dramatic weekend for UK politics, Nicola Sturgeon said there is “no democratic justification whatsoever for Boris Johnson or anyone else seeking to block the right of the people of Scotland to choose our future”, leaving financiers asking themselves if they are ready for a break-up that could make Brexit feel like an appetiser.
Citigroup has predicted a 35pc chance of Scottish independence in the next decade, warning after polls pointed to the pro-independence party’s victory that “the makings of the UK’s next major political melodrama – ‘Scexit’ – seem now to be broadly in place” with acrimony between Westminster and Holyrood set to grow.
Boris Johnson, who told The Telegraph last week that he would reject calls for an “irresponsible and reckless” referendum, sought to capitalise on Sturgeon’s failure to win an outright majority by inviting her to a summit to save the union over the weekend. Sturgeon immediately called for another referendum.
She said any attempt to block the move would demonstrate that “Westminster no longer sees the UK as a voluntary union of nations” which in itself would be a “powerful argument” for independence.
Watch: Concerns grow over SNP plan to seek Scottish independence
Credit Suisse’s UK economist Sonali Punhan argues that independence could have “significant consequences for Scotland’s public finances, trade and banking system”.
“A rising risk of Scottish independence, and consequent uncertainty over Scotland’s future currency arrangements, will consequently lead to rising financial stress and turbulence within the UK, especially given Scotland’s large financial sector. That may render UK assets less palatable to international investors,” she warned.
Scottish independence has for decades been a sensitive topic in finance circles, with senior bankers and investors in the country expressing opposing views on which party is best for business. One fund manager who voted SNP but would not back independence said a referendum “would be a distraction not a disaster” arguing that the “finance community is not on side [of a split] but is not frightened”. Another argues a break-up could have serious unintended consequences, with Westminster setting the terms.
He says few business people in Scotland will want to be seen discussing the risks of independence out of fear of losing contracts or influence with the government. Edinburgh-based NatWest, until last year known as the Royal Bank of Scotland, has already angered Sturgeon in recent weeks by publicly outlining plans to move its headquarters to London in the event of a split.
“The obvious risk is a prolonged period of political uncertainty that starves the country of confidence or investment,” one Edinburgh-based financier says. “We are seeing a bit of that already on the back of people holding off decisions because of Brexit, then Covid. Now Scexit?”
Financiers have always played a key role in the debate. When NatWest’s ex-chairman Sir George Mathewson declared his support for the SNP in 2007, claiming that a split would not damage Scotland's economy, Tony Blair accused him of being “self-indulgent” and “absurd”.
The banker laid out his arguments again before the 2014 referendum, saying an independent Scotland could boost financial services. In contrast Alistair Darling, the former chancellor, said a break-up would be worse for the UK than the 2008 banking crisis. He recalled being told that NatWest, then the world’s largest bank, had just three hours before it would collapse but noted that this was a temporary crisis whereas “the decision on Scotland is forever”.
John Cronin, a banks analyst at Goodbody, said the banking industry would be one of the worst affected sectors should there be a split “given the bias of their activities towards the UK market” with taxpayer-backed NatWest, which employs more than 10,000 people north of the border, being the most exposed alongside Virgin Money, TSB and Lloyds.
As a result banks have had contingency plans in place ever since the 2014 vote on independence. NatWest reiterated recently that the bank would move its sprawling headquarters on the outskirts of Edinburgh out of Scotland after 294 years if the country becomes independent. Sturgeon hit back, saying she did “not accept” the rationale that NatWest's balance sheet was too big for an independent Scotland.
Watch: 10 ways to Brexit proof your finances
The bank’s ex-chairman Philip Hampton, who ran the lender in the years after the 2008 crash, does not think a split would be existential for the lender or for financial services although he says a lot would rest on the terms of a break-up.
“I don’t think it [independence] would matter much for NatWest – they could adjust, I think, without material cost or disruption,” says the FTSE 100 veteran. “On financial services generally, it would depend on the arrangements made with Brussels and London. My guess is Brussels would try to be helpful to a newly independent Scotland, because it’s a pro-EU country. But a lot of activity currently comes under English law and London regulation [such as the FCA]. So Scotland would need to set up replacement bodies or continue trying to use the existing regime. The latter isn’t consistent with real independence and would require the UK to agree.
“Scotland’s population is around two thirds the size of Switzerland, which has a major financial services industry. So these things are possible. Edinburgh has long been a successful centre for asset management in particular.”
Yet the likelihood of a second referendum, dubbed IndyRef2, is still viewed as a distant threat in City circles. Bank lobby groups are merely keeping an eye on the matter while traders in London are “basically ignoring it until it becomes a serious possibility again”, says Neil Wilson, chief market analyst at markets.com, pointing out that traders’ horizon is “three to six months tops”. Morgan Stanley analysts put the possible date for independence at 2025 at the earliest.
“In the highly unlikely event of Scottish Independence happening there would be some significant damage, but I’d characterise it as more the fallout associated with recession – damage for Scotland-exposed banks through revenues and bad debts – rather than structural issues,” says Ian Gordon, a banks analyst at Investec.
Having spent the last few years battling over the UK's future with the EU, discussions in the coming months will turn closer to home as Scotland's booming finance industry grapples with the prospect of independence.
