[07.05 update below on RBS] Yesterday, 10th September, three major companies indicated that they would be likely to move their headquarters and, in some cases, elements of their business, south of the border in the event of a vote for independence.
The three companies are the insurance specialist Standard Life, and the bankers, Lloyds Banking Group and Royal Bank of Scotland [RBS]. RBS has signalled that its formal statement will come early this morning but the Treasury said last night that RBS, as well as Lloyds, has had discussions with it on this matter..
It has to be emphasised that these are not politically driven positions but commercial ones focused principally on the need to reassure customers, and principally non-Scottish customers because the greatest proportion of the business of each of these three companies is outwith Scotland. This reassurance to customers is:
- that their deposits and investments will be safe;
- that they will be protected from the risks calculated to be associated with a likely move of Scotland to independence this day next week, 18th September 2014;
- and that they will continue to be guaranteed by the Bank of England acting as lender of last resort.
‘Moving out’ involves a bit of a pick-and-mix as to what exactly is moved.
- the business – funds and fund management – might be moved out [as some already have been];
- the registered office might move, which might be no more than a legal address for the registration and a plaque at the door;
- the head office might move.
The impacts that each of these moves would have on Scotland vary and are noted below. The impacts on Gross Domestic Product [GDP] are important. The International Monetary Fund defines GDP as measuring ‘…the monetary value of final goods and services—that is, those that are bought by the final user – produced in a country in a given period of time [say a quarter or a year].’
It doesn’t matter where a company is formally registered or where it has its active headquarters, what is measured as GDP is the economic activity that takes place in a specific period of time in the country in question.
- moving out the business – the funds and fund management – would impact on jobs; and would also impact on Scotland’s GDP, which in turn influences the rates charged for state borrowing and the measurement of the health of its economy in its debt to GDP ratio;
- moving the registered office would not alone impact on jobs and would not impact on GDP but would, however, see profits ship out. In the case of the two banks, though, this might be little different from what happens currently.
- moving the head office might impact on a modest number jobs but need not, alone, impact on GDP.
Standard Life’s contingency plan involves restructuring its business in order to move the savings, pensions and investment accounts of non-Scottish customers south across the border to subsidiary companies established there. 90% of its business lies outside Scotland, which is an indication of the scale of the consequent loss to Scotland’s GDP and to jobs.
Lloyds and RBS would also be likely to have to relocate businesses managing the deposits and funds of customers outwith Scotland and that would impact directly and substantially on GDP. The GDP for which these operations account would, with that from Standard Life, then count towards the total GDP of the continuing United Kingdom.
It is being said that the loss of this GDP could impact negatively on the credit rating an independent Scotland would be given, which could have an impact on inward investment and on borrowing rates.
Since it is likely that such contingencies as these businesses contemplate would be carried out quite soon following a vote for independence, it would be naive in the extreme, with Standard Life first announcing this contingency back in February this year, to imagine that the legal instruments to enable this action are not now ready, should a decision have to be made to use them.
Lloyds Banking Group already has its head office in London and has had for some time – but its registered office is in Edinburgh. It’s planned move of its registration would, as a ‘brass plate job’, have no impact on jobs in Scotland. It said last night, after discussions with the Treasury, that its contingency plans ‘ include the establishment of new legal entities in England’, stressing that ‘This is a legal procedure and there would be no immediate changes or issues which could affect our business or our customers.’
Lloyds is also considering relocating its Bank of Scotland, Halifax and Scottish Widows divisions to London, which would explain the above reference in its statement to ‘legal entities.’
RBS employs more than 12,000 people in Scotland; and Lloyds around 16,000.
What influences decisions to move out?
There are a range of factors at work here.
A big one is customer and investor confidence in the security of investments against any background of perceived risk raising issues of financial stability. With an independent Scotland’s currency unlikely to be known for some time after such a vote, an early and clear action to protect savings, pensions and investments by moving non-Scottish business into the continuing United Kingdom would provide the necessary reassurance. Located there, such assets would immediately and into the future operate in the international hard currency of the pound and benefit from the support of the Bank of England as lender of last resort.
Another issue is the question of quite what EU law intends to prescribe in an apposite directive, Council Directive 95/26/EC of 29 June 1995.
This directive says that a bank must have its head offices ‘in the same member state as its registered office’, indicating that RBS and Lloyds would be required to have both their registered and head offices south, if Scotland chose to separate from the United Kingdom. The implication here is that those registered and head offices should be located where a company has the greater proportion of its business – England for Lloyds and RBS. This directive has, however, not been tested in the courts so there is no case law to clarify its usage.
The additional uncertainty about how pensions would be funded and regulated in an independent Scotland is a concern; as is the inevitable lack of information on the fiscal context of mortgages and how mortgages would be regulated. It is possible that mortgage providers would restrict their lending in the aftermath of a ‘Yes’ vote because of the uncertainties on currency and the mortgage regulator.
On the currency issue, with a currency union unachievable, were Scotland to opt to introduce a new Scottish currency and peg it to the pound, the governor of the Bank of England, Mark Carney, told the House of Commons Select Committee yesterday that to stand behind its banks, Scotland would have to raise between £10Bn and £100Bn of hard currency reserve. This would be a tough ask and would leave the country with less to spend on public services.
There is a related issue – that of private individuals’ savings, pensions and investments – and an issue which also involves businesses operating in Scotland.. The key factor here is again currency.
If Scotland introduced a new currency pegged to the pound, with a Scottish central bank as its lender of last resort and with the necessary reserves to enable that guarantee, such a currency would inevitably be weak initially until its performance had convinced the markets.
That weakness would mean that the money markets would pay less than its nominal value for it against hard currency, and that would mean de facto and possibly disorderly devaluation. This would impact on everyone – and on the state with hikes in borrowing charges. Such devaluation is part of the scenario that the bank, Credit Suisse, was warning about on 9th September.
This would make exports cheaper, which would be good for the economy; but negatively, it would make imports more expensive – including imports from the continuing United Kingdom, which would be a foreign country. At an individual and family level, it would make some imported products in normal use and foreign holidays more expensive because of the unfavourable exchange rate – and this would include visits to the then foreign continuing United Kingdom.
07.05 update: RBS has issued the following statement:
RBS says that: ‘there are a number of material uncertainties arising from the Scottish referendum vote which could have a bearing on the Bank’s credit ratings, and the fiscal, monetary, legal and regulatory landscape to which it is subject’.
Consequently, it says: ‘As part of such contingency planning, RBS believes that it would be necessary to re-domicile the Bank’s holding company and its primary rated operating entity (The Royal Bank of Scotland plc) to England. In the event of a ‘Yes’ vote, the decision to re-domicile should have no impact on everyday banking services used by our customers throughout the British Isles. However, RBS believes that it would be the most effective way to provide clarity to all our stakeholders and mitigate the risks previously identified in our Annual Report.’
An RBS re-domicile would impact on jobs but not, alone, to the extent that would be the case if and when it were to move south the management of accounts held by clients outwith Scotland.
There will be a felt response as well as a commercial one to seeing the Royal Bank of Scotland domiciled elsewhere – a signal change for a company that was born in Scotland and has been there ever since.
