The Implications of Scottish Independence on Business: Higher Education and Research: and Postal Services - Business, Innovation and Skills Committee Contents

3  Regulation

Scottish 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 that:

    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.[29]

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. [30]

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".[31]

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.[32]

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.[33] 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.[34]

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.[35] 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".[36] 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".[37]

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.[38] He further highlighted the fact that in the longer-term, businesses which currently deal with one regulator would have to deal with two.[39]

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.[40]

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".[41] 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.[42] 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".[43]

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".[44]

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 affected.[45]

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 industry—certainly that is true in the UK—and 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 very complex.[46]

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

30   The Scottish Government: Scotland's Future: Finance and the Economy  Back

31   The Scottish Government: Scotland's Future: Finance and the Economy Back

32   Economic Affairs Committee, House of Lords  Back

33   Q2 Back

34   Economic Affairs Committee, House of Lords  Back

35   Q15 Back

36   Q15 Back

37   Q15 Back

38   Q15 Back

39   Q15 Back

40   Q15 Back

41   Q15 Back

42   Q16 Back

43   Q17 Back

44   Q18 Back

45   HM Government, Scotland Analysis: Business and microeconomic framework page 35 Back

46   Q176 Back

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Prepared 8 August 2014