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Scotland Analysis

Volume 563: debated on Monday 20 May 2013

The Government have today published the third paper in the Scotland analysis series to inform the debate on Scotland’s future within the United Kingdom.

“Scotland analysis: Financial services and banking” examines how the financial services and banking sector currently operates across the UK, and the implications of a vote for independence on the industry and its customers.

The analysis shows that financial services and banking sector employs around 7% of the total Scottish workforce and contributes more than 8% of onshore GDP to the Scottish economy. As part of the UK, Scotland benefits from and contributes to the UK’s position as a global leader in financial services. The UK is seen as having a strong tax and regulatory environment which supports a competitive financial centre. The size of the industry relative to the UK economy means the UK is resilient to financial shocks and has in the Bank of England a strong and credible lender of last resort. Consumers are in turn protected by the UK’s financial services compensation scheme which guarantees deposits in UK banks up to £85,000.

In the event of a vote for independence, there would be consequences for the financial sector and for its customers, including all individuals and businesses. The most profound implication is that independence would create two separate financial jurisdictions: the continuing UK and a new, independent Scotland, which would require its own legal and regulatory framework.

An independent Scotland would have an exceptionally large financial services sector compared to the size of its economy, making it more vulnerable to financial shocks than as part of the UK. The assets of the whole UK banking sector around 492% of total UK GDP. By contrast, Scottish banks have assets totalling around 1,254% of Scottish GDP, assuming that firms did not make significant changes to their group structure.

The UK has established effective arrangements for protecting consumers of financial services. These ensure that customers benefit from consistent standards and fair treatment across the whole UK. An independent Scottish state would need to establish its own financial consumer protection because of EU requirements that member states have their own schemes for protecting customers’ deposits. The paper also examines the implications of independence on individual’s personal finances, including from bank accounts, pensions, savings, insurance products and mortgages.

The analysis concludes that Scotland has a strong and vibrant financial services industry. As part of the UK, firms and individuals benefit from a world-leading financial services sector and a large, integrated domestic market for financial services with few barriers to business conducted between Scotland and the rest of the UK. Consumers benefit from clear and effective arrangements for protecting their savings and deposits. This position would be put at risk if Scotland were to become independent, fragmenting the market and the bodies that have been put in place to protect customers, creating additional difficulties and costs for households and businesses, as well as for financial services firms themselves.

The paper published today follows the Government’s paper outlining the currency and monetary policy implications of independence, published on 24 April. That paper concluded that the UK currently enjoys a full monetary, political, fiscal and currency union and that none of the currency options under independence would serve Scotland as well as the current arrangements within the UK. The paper also set out that the economic rationale for the UK to enter a currency union with an independent Scotland was not clear.

Future papers from the Scotland analysis programme will be published over the course of 2013 and 2014 to ensure that people in Scotland have access to the facts and information ahead of the referendum.