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ANALYSIS: Weighing The Damage, Benefits Of An Independent Scotland

Stephen Little, Reporter, London, 15 September 2014

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Voters in Scotland face the momentous choice this week whether to become a fully independent state. The economic costs and benefits are fiercely contested. This publication spoke to wealth managers for their views.

As the 18 September Scottish referendum deadline nears, fears continue to swirl that an independent Scotland will face serious economic and currency issues while the impact on what is left of the UK will be severe, at least in the short-term.

Wealth managers told this publication that if voters in Scotland do choose to end 300 years of union with England, it will hit UK gross domestic product, put downward pressure on sterling, and create uncertainty. Latest polls at the weekend gave the "no" side a narrow margin but well within the range of uncertainty.

After weeks when the issue rumbled in the background, overshadowed by developments such as in the Middle East and Ukraine, the referendum issue exploded for markets and pundits when a recent opinion poll by YouGov for The Sunday Times gave the independence campaign a narrow lead for the first time.

In general, most bank commentaries on independence have said the costs, at least for the initial period of any transfer to independence, will be high.

One of the most trenchant criticisms came from Deutsche Bank. In a note last week, the German bank said that Scottish independence could have negative consequences "far beyond what voters and politicians could have imagined" and be as bad for the economy as the blunders that led the world into the Great Depression.

"A 'yes' vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill's decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US. These decisions – well-intentioned as they were – contributed to years of depression and suffering and could have been avoided had alternative decisions been taken," Deutsche said.

Alex Montgomery, chief executive of wealth management business Turcan Connell Asset Management in Scotland, has warned that Scottish independence could have serious consequences for the wealth management industry on both sides of the border.

“Wealth managers are definitely concerned about the potential consequences of a yes vote,” said Montgomery.

“The biggest issue is likely to be regulation because an independent Scotland would be required to have its own financial services regulator. Businesses serving clients in both Scotland and the residual UK would have to satisfy two regulators which would be likely to be a significant additional burden for firms. To satisfy the requirements of a new and additional regulator is going to increase costs. There are just no two ways about it,” he added.

The surge of support for independence has rattled the markets, wiping millions off the value of shares in Scottish companies as well causing the pound to slump to a 10-month low.

In response, UK political leaders scrambled to offer Scotland greater autonomy through a new series of measures, including increased tax and welfare powers, in a bid to avert a victory for the "yes" camp, while firms such as Standard Life and BP have also threatened to leave if Scotland gains independence.

Fund group AXA Investment Managers has said the UK GDP next year could be around 0.75 per cent lower than predicted, while Goldman Sachs has warned that a "yes" vote could have "severe consequences" for the Scottish and UK economies.

With polls now putting the “no” camp slightly ahead, the referendum looks set for a nail-biting finish, which many experts fear could plunge the UK into a constitutional crisis and even push back the date of next year's general election.

Regulator

In the event of a “yes” vote, Scotland is likely to ditch the Financial Conduct Authority in favour of its own regulatory authority that would work on a "closely harmonised basis" with UK counterparts.

According to a white paper published last year, an independent Scotland would set up its own system of financial regulation, including its own equivalents of the FCA and the Financial Services Compensation Scheme.

Hamish Patrick, a partner at Scottish-based financial services law firm Tods Murray, warned that if Scotland gains independence, firms could end up paying increased compliance costs as a result of two independent authorities.

“In terms of the rules I expect Scotland will just import [either or] replicate the ones currently used by the UK. This will be simpler to do in the available time and also increase stability, with amendments made at a later stage,” said Patrick.

“While the ‘yes’ campaign has indicated that there could be a new financial services regulator in Scotland within 18 months, it is a challenging timescale. On top of this it will need to have credibility to take over various functions. A lot of the manpower and experience is also in London, which is also an issue,” he added.

Adrian Murphy, partner at Glasgow-based Murphy Wealth, said that he did not see cross-border arrangements being an issue as Scotland would “essentially be using the same rulebook as the FCA”.

“I would hope that Scotland has a leaner, more efficient regulator than in London as there would be nothing like the complexity or numbers involved currently,” said Murphy.

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