Monthly Archives: September 2014

The Impact of Scottish Independence – Part 2

In this second part of our Scottish Independence coverage, Kevin Herron looks at financial security, pensions and interest rates.


  1. Financial Security

Something that could see a great deal of movement of assets is the area of financial compensation – if one country were to offer a greater level of investor protection, then it could see an influx of new investment at the expense of the other. During the height of the credit crunch, there was a massive influx of deposits from banks in Northern Ireland to banks in the Republic of Ireland due to their greater level of investment protection.

A number of the biggest banks and investment companies in the UK such as Lloyds, RBS and Standard Life are registered in Scotland, and a number of them have already stated their intention to move to re domicile to England in the event of Scottish independence. However, if the majority of them decide to stay in Scotland, what impact would this have on investor security?

A number of commentators have raised concerns about the impact of a large proportion of the economy of a small country like Scotland being dominated by the banking, investment and insurance sectors. If we were to go through another credit crunch, would Scotland go the same way as Iceland in 2008 when their three main commercial banks collapsed and they narrowly avoided national bankruptcy.


  1. State Pensions and Auto Enrolment


In 2016, the state pension system in the UK will change to a single tier basis and will pay the equivalent of £146.30 per week. In the event of a Yes vote, the Scottish Nationalist Party (SNP) has confirmed that they will continue to retain the single tier pension, but considerable doubt has been expressed by the No Campaign as to the ability of an independent Scotland to do so.

The effect of increased longevity, and the increase in the ratio of pensioners to the working population has put a great deal of pressure on state pensions worldwide, and the government have taken steps to counteract this by increasing the state pension age to 68 between now and 2036.

Unpublished data from the Department of Works and Pension (DWP) suggest that this impact will be much more pronounced in Scotland than in the rest of the UK – by 2030, the number of Scots over the age of 60 will increase from 20% of the population to 30%. The impact of this could be counteracted by the fact that average life expectancy in Scotland is lower than the rest of the UK – in other words, it is likely that a pension will be paid to more people in Scotland but may not be paid for as long as it would in England and Wales.

Another key tool in reducing the pressure on the state pension is auto enrolment – by 2018, every employee in the UK will have access to a pension scheme that their employer will have to make a contribution to. Will an independent Scotland continue to enforce a version of auto enrolment, and if not, how would this affect Scottish companies and employees that have already gone through the process?

Auto enrolment can be an expensive and time consuming process, and if Scotland were to not continue auto enrolment, would English companies try to register in Scotland to avoid their obligations?


  1. Interest Rates


Regardless of whether fiscal union is retained or not, an independent Scotland would almost certainly receive a lower credit rating than the UK enjoys currently, which means that it will cost more to borrow money on the international market. This will be passed down to consumers as higher interest rates which could see mortgage costs increase, but be good news for savers and those looking to purchase an annuity.

If there is a substantial difference in interest rates between both countries, it will be very interesting if there is a migration to one country or the other to take advantage of the differential.

The impact of differences in interest rates as well as currency and tax will see a great deal of cross border movement by consumers – the border between Northern Ireland and Republic of Ireland has long seen people flocking to one side of the border or the other to buy items such as petrol and electrical goods depending on the relative strengths and weakness of Sterling against the Euro, and differences in VAT and excise duties.



We will be keeping a very close eye on the results of the Scottish referendum on Thursday and of course will be keeping on top of any financial developments in the event of a yes vote. As a general position, it would appear that the ‘markets’ would prefer a no vote as evidenced by the volatility we have seen since the yes campaign has been gaining traction.

In the event of a yes vote we do expect that there will be some movements in the markets and we will be keeping a very close eye on client portfolios and may make some recommendations outside of the usual review process if the impact on the markets turns out to be particularly profound. As with many of these things we expect that any movements in the market will be a reaction to the result itself rather than any specific financial implications (most of which are unknown at this point).

In the event of a yes vote there will be many un-answered questions about the continuing operation of pensions, NISA’s and other investment plans. While people will be very keen to know how the operation of these products will work in the future, we would expect the impact on investors in England being relatively limited. We will, of course keep you updated on any developments as they happen.

The Impact of Scottish Independence – Part 1

With just under a week to go before the results of the referendum, the most recent polls suggest that the contest between the No and Yes camps seems too close to call. Given the very real prospect of Scotland leaving the Union, many investors are concerned about how this will impact on them. Senior Paraplanner, Kevin Herron has written a series of articles about some of the potential issues. Today he looks at currency and regulation.


Probably the most important concern would be what currency the independent Scotland would use – despite the unequivocal rejection of the concept of a shared currency, the Yes campaign are keen to retain Sterling (either as a formal fiscal union, or as a new currency that is more informally linked to Sterling).

While this has a number of repercussions on a macroeconomic level, it will introduce a level of currency risk for investors. It is likely that any separation of currency will cause a great deal of volatility in both currencies in the short to medium term, which will greatly impact those who receive income in one currency but pay their bills in another.

Consider the example of a Scottish pensioner is receiving a pension of £100 per month which is the equivalent of £80 “McDollars” – if currency movements mean that this pension is now only worth £70 “McDollars”, how will this affect their ability to meet their daily living expenses.

One option could be that Scotland joins the EU and adopts the euro, but the recent comments from the President of European Commission, Jose Manual Barroso, suggest that this is highly unlikely.


Regulation and Governance

While recent reports seem to suggest that the Bank of England and Financial Conduct Authority (FCA) would retain certain elements of control if a formal fiscal union is agreed, it is clear that an independent Scotland would need to set up it’s own system of financial regulation.

If Scotland was unable to obtain membership of the European Union, how would this impact on the ability of people to obtain cross border financial advice? European legislation permits financial advisers to apply in their home state for authorisation to provide services in other EU countries.

As an independent country that is not a member of the EU, Scotland would have the same legal status as countries such as Norway and Iceland, and while it seems unlikely, it could mean that an adviser registered in England or Wales could no longer advise clients living in Scotland (and vice versa). It is probable that firms would be able to apply for registration in both territories, but the additional costs of two registrations, along with the difficulties of dealing with two regulators with different rules, may see many companies deciding to avoid these difficulties entirely.

Current investment wrappers such as NISA’s are eligible to UK residents only, so in the event of independence, would not be available to Scottish residents. While it is likely that similar types of investments would be introduced for Scottish investors, any provider looking to remain active in both jurisdictions is going to have to spend a great deal of time and money in marketing different products for each country, and ensuring that their existing customers are properly segmented as Scottish and English residents.