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.

Currency

One of the greatest concerns regarding independence is the issue of currency. The options include a currency union with the UK; using sterling without a currency union in a similar way Panama uses the US dollar; creating a new Scottish currency along with an independent monetary policy and new central bank; or adopting the euro. This publication was recently told by Societe Generale, the French bank, that none of the choices are good ones, with each facing significant drawbacks.

The three main UK political parties have said that Scotland would be unable to keep the pound in the wake of independence. However, the Scottish government favours keeping the pound and has accused the UK of bluffing over its threat to end the currency union.

“A currency union would be the way to go to provide stability for both countries. It would be crazy to think otherwise that the UK parties would cut their noses off to spite their face,” said Murphy.

Scottish First Minister and leader of the Scottish National Party Alex Salmond has said that using the pound without a formal agreement, a policy known as sterlingisation, could be a possible "transitional option".

Montgomery raised concerns about the likelihood of a currency union and questioned the Scottish government’s use of sterling without an agreement.

“In particular, we have not been persuaded that the most likely outcome would be to achieve a formal currency union with the UK. We feel it is a very long way from a certain outcome,” said Montgomery.

“An independent Scotland using sterling without a currency union in a similar way that Panama uses the US dollar, could have significant consequences and brings with it a lot of uncertainty. Scotland would have no control over its interest rates, and there would be no central bank or lender of last resort, which has consequences for Scotland’s banking industry and the country’s potential entrance into Europe,” he added.

Salmond has insisted that Scotland would be able to remain a part of the EU, with negotiations being finalised within 18 months of the referendum. However, the former EU commissioner for monetary union, Olli Rehn, believes it would "simply not be possible" for an independent Scotland to join if it chooses to use the pound without its own central bank or a formal currency deal.

Relocation

In anticipation of Scotland gaining independence from the UK, Standard Life and Royal Bank of Scotland have warned that they might have to relocate significant operations and assets outside of the country, adding to growing business concerns over the looming vote.

Lloyds Banking Group has also said it is making contingency plans to move its headquarters from Edinburgh to London, while earlier this year Alliance Trust said it was taking steps to build a presence in England as a precautionary move.

In contrast, Aberdeen Asset Management has said that it has no plans to move its headquarters out of Scotland, while Baillie Gifford is committed to staying in Edinburgh "whatever happens in the referendum”.

"Some of Scotland’s financial sector companies could shift their headquarters to London or elsewhere given the likely economic disruption; that might significantly hit the economy. Overall, we judge that the few years following the vote would be tough albeit not calamitous," said Robert Wood, chief UK economist at German bank Berenberg.

Montgomery said that Turcan Connell’s decision to locate premises in London offered the firm protection from conclusions clients might reach about changes brought on by independence. 

“Well before the referendum we made a clear commitment to also be physically present in London with the capacity to hold client assets and advise our clients in the south. By being nearer to clients, we have protected ourselves from any conclusions they might reach about having advisors in a foreign country with different regulations and currency,” he added.

Banks

Royal Bank of Scotland and Lloyds Banking Group have both said that their businesses would be affected if Scotland were to leave the UK.

In its annual report, RBS warned that Scottish independence would have a "material adverse effect" on it and could also damage the group’s credit rating. Lloyds also said it had concerns about a yes vote on compliance costs, the tax position and cost funding of the group.

Eric Lascelles, chief economist at RBC Global Asset Management, said that RBS and Lloyds would likely move their headquarters to the UK as a result of a yes vote.

“This would be partially to retain the certainty of British regulations, partly to retain sure access to EU markets, and mainly to retain access to the BoE lending window. In contrast, Scottish-based institutions would be without a lender of last resort – a dangerous vulnerability,” said Lascelles.

“Also, RBS is 81 per cent owned by the British government, with Lloyds 25 per cent publicly owned. The exit of these firms would be a big hit to the Scottish economy, even though moving headquarters would not mean the wholesale removal of all operations,” he added.

Toby Nangle, head of multi-asset allocation at Threadneedle Investments, said that a yes vote could leave banks in Scotland run either as foreign branches or separately capitalised Scottish subsidiaries.

“Scottish banks could see their value fall should they suffer depositor flight. Domestic Scottish-facing companies with significant amounts of sterling debt referencing English law may find their assets and liabilities no longer matched. This situation has caused all sorts of problems in emerging markets where this sort of mismatch is most common,” he added.

Goldman Sachs said that uncertainty surrounding the currency union could cause a run on sterling and capital flight, leading to a eurozone-style crisis occurring in the UK.

"Moreover, even if the sterling monetary union does not break up in the event of a yes vote, the threat of a break-up would provide investors with a strong incentive to sell Scottish-based assets, and households with a strong incentive to withdraw deposits from Scottish-based banks," said Kevin Daly, senior economist at Goldman Sachs.

According to Montgomery, Turcan Connell had been contacted by a number of clients worried about the physical location of their assets.

“We diversify their deposits across a number of banks so they are not excessively exposed to certain banks, minimising risk in the event of a run on the bank,” said Montgomery.

Split

A recent survey by Withers on members of the UK’s wealth management industry, examining the impact of an independent Scotland on clients was evenly split, with 53 per cent saying that it would not have an impact, and 47 per cent saying that it would.

Montgomery said that a number of clients had contacted Turcan Connell expressing anxiety about the referendum and the consequences of independence.

“It has been pretty difficult as someone running a wealth management business to provide clear guidance on the potential consequences of either outcome,” Montgomery said.

“A ‘yes’ takes us into a lengthy period of negotiation, with relatively few certainties about the resulting arrangements for key matters such as currency, financial services regulation, pensions or income and capital taxes.  A ‘no’ outcome looks highly likely to lead to a negotiation about the extent to which additional powers would be devolved to Holyrood,” he added.

In contrast to much of the pessimism surrounding a "yes" vote in the wealth management industry, Murphy believes independence was a “huge opportunity” for Scotland, giving the government the power to implement policies that specifically benefit the nation and in turn generate wealth.

“It is not good for business if everybody is so London-centric,” said Murphy. “Independence will help to rebalance the industry away from UK capital. Some businesses have said they will leave Scotland, but I think we will have to wait to see what happens when the dust has settled. I’m positive about the wealth management landscape,” he said.

While the outcome of the referendum is relatively unpredictable, Nangle believes another vote in the near future looks likely if the no vote wins by a slim majority.

“And while less disruptive to financial markets, this looks to be of great danger to the people of Scotland,” said Nangle.