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An independent Scotland would be obliged by EU law to establish its own financial services regulator, UK Ministers told a Commons Committee.
Appearing before the Scottish Affairs Committee, Chief Secretary to the Treasury Danny Alexander and Scottish Secretary Michael Moore told MPs that there is no precedent for Member States sharing these functions. The Ministers also confirmed that the UK Government will publish the next Scotland Analysis paper on Financial Services and Banking next week.
The Scotland Analysis paper will provide a detailed explanation of the current structure of Scottish financial services in the wider UK and set out the benefits it provides for Scottish financial companies and Scottish customers.
Danny Alexander told the Committee:
“Every independent sovereign state in the EU is required to have its own separate system of financial regulation and that is something that is just a fact.
“It would be very, very seriously disruptive to the very strong financial services sector we have in the UK to have two systems of regulation which would be developing in different ways over time.”
“Much of the success of the UK financial services sector comes from having a single regulator.”
Background note on financial regulation framework
If Scotland became independent it would be required to establish its own financial services regulator. This would mean:
- The Bank of England’s role for supervising the financial system would remain within the continuing UK.
- Independence would create two, separate financial jurisdictions – breaking-up one of the most successful financial services sectors in the world.
- Under EU law, Scotland would have to establish its own financial services regulator and, for example, its own depositor protection arrangements. There is no precedent, and it is not allowed within the EU, for Member States to share these functions.
The impact on Scotland:
- There is currently a single regulatory framework covering the whole of the UK. This could not continue if Scotland became a separate state. If an independent Scottish state became a member of the EU it would be required to establish its own financial regulator.
- This means that firms based in the UK, with Scottish presence, will be forced to comply with two regulatory and tax regimes rather than one. This is a problem because:
- It is likely to increase the costs of regulatory compliance – for example, they may have develop separate products to comply with different regulations in different markets.
- The separate regulatory regimes would be likely to diverge over time, creating barriers to trade that do not currently exist. International experience shows that borders reduce flows of products, money and people. Differences in regulation is a key driver of this.
- Firms based in Scotland would lose the benefits associated with being regulated under a well-established regulatory framework. Industry and international bodies view the UK as a strong tax and regulatory regime, building customers’ and partner organisations’ trust in UK financial firms. The Global Financial Centres Index (GFCI) rates London as the most competitive international financial centre, scoring particularly strongly on regulation and the quality of people. International investors know and value the fact that large financial firms based in Scotland will share the City of London’s UK-wide regulatory framework, in which banks are overseen by the Bank of England under UK law.
- Overall, these factors are likely to increase costs to business which could be passed on to consumers.