3 Regulation |
Government White Paper: Financial stability and financial regulation
29. The Scottish Government's White Paper addresses
its proposals for a new regulatory structure in two specific areas.
The first addresses the regulation of the financial sector and
highlights "the safety and soundness of financial institutions
and the overall financial system as a whole", and the second
is the "conduct and behaviour of financial institutions and
how they interact with their customers".
30. In respect of the first, the White Paper states
In light of reforms to improve the resilience
of the global financial sector, the clear trend toward cross-border
co-ordination and with significant financial firms operating across
Scotland and the UK, financial stability policy will be conducted
on a consistent basis across the sterling Area. This is in line
with the proposal of the Fiscal Commission. It is also consistent
with international trends, which includes the creation of a European
Banking Union with the European Central Bank taking responsibility
for regulating the largest Euro Area banks.
31. It goes on to state that:
The Fiscal Commission set out that the Bank of
England Financial Policy Committee will continue to set macroprudential
policy and identify systemic risks across the whole of the sterling
Area. There could be a shared sterling Area prudential regulatory
authority for deposit takers, insurance companies and investment
firms. Alternatively this could be undertaken by the regulatory
arm of a Scottish Monetary Institute working alongside the equivalent
UK authority on a consistent and harmonised basis.
The Bank of England, accountable to both countries,
will continue to provide lender of last resort facilities and
retain its role in dealing with financial institutions which posed
a systemic risk. 
32. The second aspect of financial regulation would
be covered by a Scottish Regulation which would "assume the
key responsibilities of the UK Financial Conduct Authority in
Scotland". The new regulator would work on a "closely
harmonised basis with the UK regulators, delivering an aligned
conduct regulatory framework, to retain a broadly integrated market
across the sterling area. The regulatory approach will include
the application of single rulebooks and supervisory handbooks".
33. In evidence to the Lords Committee on Economic
Affairs, John Cridland, Director-General of the CBI, saw the UK
single market as a key UK asset which delivered "certainty
and level playing field of rules on tax, law and regulation"
which assisted economic growth. He saw a risk that two separate
nations would lead to a fragmentation of the single market.
34. Iain McMillan saw this to be of particular relevance
to the financial sector because of the fact that 90% of the clients
of the Scottish financial sector resided outside of Scotland.
He believed that if Scotland was an independent country there
would "inevitably be a divergence of all the laws and the
rules and regulation" and that this could add unnecessary
complexity to businesses' administration.
The impact of is made clear by the fact that the House of Lords
Report noted that Scottish insurers sell 6% of their products
in Scotland and 94% to the rest of the UK; and that roughly 16%
of mortgages sold by Scottish firms are to Scottish postcodes
and 84% to the rest of the UK.
35. Jo Armstrong Independent Economic Researcher,
Centre for Public Policy for Regions (CPPR), University of Glasgow,
noted that the Scottish Government had produced "a fairly
broad-brush paper on the regulatory framework they would be looking
to establish" but acknowledged that, at present, Scotland
lacked some of the skills needed to run it efficiently and effectively.
Until that skill shortage was addressed she said that there would
need to be "some sort of arrangement by which some of the
regulatory structures continue to perform for the benefit of Scotland".
In summary, she asserted that there would be a "requirement
to piggyback off the back of existing activities in the UK"
which would require "a world of negotiation and potential
service level agreements or transition periods".
36. Iain McMillan argued that there could be economies
of scale to be gained from sharing regulators but warned that
a UK-wide regulator may not regard a small matter in Scotland
as being "top priority", whereas an independent regulator
in Scotland would.
He further highlighted the fact that in the longer-term, businesses
which currently deal with one regulator would have to deal with
37. In respect of financial services, Iain McMillan
believed that EU law required separate regulators in an independent
Scotland and the rest of the United Kingdom. He argued that this
would not only result in additional costs to business but would
also introduce a "whole panoply of laws and rules and taxes":
Over time, businesses may be dealing with a different
corporation tax regime, for example, north and south. Corporation
tax may come down in Scotland. The business rate has not. There
is power for that now; it has not come down. The corporation tax
could, but then it would have to come down to at least an extent
that would offset the cost of having to segregate taxable profits
north and south of the border and also the compliance costs with
HMRC south of the border and a Scottish revenue authority. Again,
this is quite an expensive thing to look at.
38. Gordon MacIntyre-Kemp argued that the "political
union and the economic policy that we get from Westminster"
did not work and therefore this was what independence would lose.
However, he argued that the independence he wished to see was
one where "we keep the bits where collaboration and cooperation
work and we lose the bits where it does not".
In that respect he believed that it was feasible for Scotland
to share some of regulators with the rest of the UK as they would
be covering an open trade zone.
He went on to argue that such an arrangement would be to the benefit
of Scotland because a shared regulator give it "more say
than we have currently".
39. Mr MacIntyre-Kemp acknowledged that any shared
regulation would be subject to "a huge piece of negotiation"
but believed that once the referendum was over "cool heads"
would find that there were "ways and means to come up with
an optimum solution in terms of regulation for both Scotland and
the rest of the UK".
40. However, the UK Government does not appear to
share Mr MacIntyre-Kemp's optimism:
In the event of the creation of an independent
Scottish state, the UK's national institutions would operate on
behalf of the continuing UK as before. They would have no automatic
power or obligation to act in or on behalf of an independent Scottish
state, and any future request to make use of arrangements that
exist in the continuing UK would be subject to negotiation.
New regulations and institutions would create
uncertainties for businesses and investors during the transitional
phase and long term difficulties for businesses operating across
an independent Scottish state and the continuing UK. Businesses
would have to absorb the burden of regulatory divergence, which
is likely to increase over time. Smaller businesses could be disproportionately
41. When he gave evidence to us, the Secretary of
State argued that a separate regulatory system in Scotland was
an unnecessary additional burden for business:
Of course, it does two things. It raises costs;
somebody has got to pay for that regulator, and regulators are
normally financed by levies on their industrycertainly
that is true in the UKand it does create uncertainty about
what that regulatory regime might be. As you know, because you
have interrogated people at the UK level, the rules are often
42. It is not in the interests of business to
impose an additional layer of regulation, especially where there
is no benefit to either business or the consumer. This will be
the inevitable outcome of a vote for independence. The Scottish
Government's ambition to deliver a regulatory framework which
is aligned to that in the UK is an impractical approach, given
the likely divergence in the two economies over time. A significant
proportion of our businesses are highly integrated across the
United Kingdom. To disaggregate them as a result of independence
would have a negative impact on them and the services they provide.
43. The benefits to business of a single UK Market
should not be underestimated. As we approach the day of the referendum
it is clear that increasing numbers of businesses are deeply concerned
about the impact of a yes vote on their future prosperity. Their
views should be seen as a clear warning that significant parts
of the Scottish economic base do not consider independence to
be in their best interests or the best interests of Scotland.
29 The Scottish Government: Scotland's Future: Finance and the Economy Back
The Scottish Government: Scotland's Future: Finance and the Economy
The Scottish Government: Scotland's Future: Finance and the Economy Back
Economic Affairs Committee, House of Lords Back
Economic Affairs Committee, House of Lords Back
HM Government, Scotland Analysis: Business and microeconomic framework
page 35 Back