The City has faced many potential threats over the years. Frankfurt loomed large as a potential rival, especially after the European Central Bank was located there. But the Germans have never really understood financial services. Paris has sporadically tried to make a play for banks and hedge funds, with little long-term success. There are plenty of worries about the potential challenge from the new centres of the Middle and Far East.
Through it all, however, London has gone from strength to strength. Europe needs a financial centre. It has a global language. It’s in the right time zone to deal with Asia and North America in the space of a single day. It has the expertise, critical mass and legal system to make it a good place to do business. Nowhere else really comes close. But now it could – just potentially – face a really serious rival.
Last week, the Scottish National Party (SNP) scored a stunning victory in elections for the country’s parliament. It’s now the dominant party in Scottish politics and in Alex Salmond it has a smart politician. A referendum has been promised for some point in the next five years. The polls show the majority of Scots still oppose breaking away, but it would be foolish to write off the possibility. The Tory-led coalition is going to become more unpopular as cuts in public spending start to bite. The vote is likely to be held at a moment of Salmond’s choosing. The leaders of the campaign to maintain the Union will be lacklustre compared to those lined up on the other side of the issue. It could easily happen.
In England, the common view is that an independent Scotland would be an economic basket case. Without English taxes to keep it afloat, it will rapidly sink. But there is one smart move a new independent Scottish government could easily make. It could attack England’s most lucrative industry –the City. An independent Scotland making a play for financial services? Crazy, most people will argue. Surely the SNP is simply the old Labour Party with a blue and white, rather than a red, flag? On getting independence, they’ll put up taxes, introduce hundreds of new regulations, and probably behead a couple of bankers just to make sure everyone gets the point.
Well, maybe. Then again, there would also be a tremendous opportunity for Scotland to build a really substantial financial services industry. After all, Edinburgh has always been a major financial services centre. It is already the fourth-largest one in Europe, measured by equity assets. It has a strong tradition in banking, life insurance and asset management. It is one of the top 30 financial centres in the world, according to the annual competitiveness index published by the City of London Corporation. Around £360bn of assets are managed in Edinburgh, about 4% of the total in Europe, and 12% of the total in Britain.
Of course, Edinburgh has taken some knocks in the last couple of years. Royal Bank of Scotland was the most spectacular victim of the credit crunch. It was the old Bank of Scotland thatwas largely responsible for the demise of HBOS. A reputation for probity and caution that Scottish banking once prided itself on has been shot to pieces and will take a long time to restore. Moreover, post-independence it would face fresh challenges. Firms such as Standard Life and Scottish Widows, giants of the Edinburgh finance industry, are big players in the pensions business. Would English savers really be happy to have all their money tied up in a foreign country? Or would there be huge pressure on those two companies to move to London to reassure the majority of their customers they were still secure? The loss of either would be a massive blow. Against that, however, think of the opportunity.
Imagine you are the newly installed finance minister for an independent Scotland. You’d need a set of policies designed to tempt some of the financial institutions to move across the border. A lower corporation tax rate would be a good start. The SNP manifesto already suggests that. A tax exemption for hedge funds might persuade a lot of the brasher money managers that weekends salmon fishing weren’t such a bad lifestyle choice.
Even better, how about a non-dom tax rule? A Scottish government would be committed to high public spending and would want to keep its tax revenues up. So it would be reluctant to cut personal taxes. But if you granted non-dom status to foreigners, many of them might re-locate to Edinburgh, and you could tax all the people who work for them. Even better, allow the English non-dom status. That would tempt plenty of them to move north.
Remember, Edinburgh has many of the same advantages as London. It is in the same time zone. It uses the same global language. It has a similar legal tradition that companies know and trust. It has a depth of experience and expertise. And it has a cluster of firms all in the same financial services industry. True, an independent Scottish government might well blow it. It might frighten away what firms are already there with a lot of banker-bashing rhetoric and ruinous taxes. But if it wanted to, it could also give the City a run for its money.
• This article was originally published in MoneyWeek magazine issue number 537 on 13 May 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.