Would an independent Scotland see capital flee south?

We wrote a few weeks ago about the possibility of capital flight from Scotland in the event of its resident population voting to separate from the UK. (Read our articles on the Scottish independence referendum here.) The SNP dismisses this as ludicrous. But it isn’t.

For the last six months I have been getting emails from readers about whether they would be wise to take their money out of the likes of Standard Life and Alliance Trust, and it was a hot topic when I talked to lots of you who came to our conference in London a few weeks ago.

Several people asked me if they should take their money out right now as a precaution against capital controls being put in place immediately after the vote. I think that would be extreme.

Even if Scotland’s residents do vote to divide the United Kingdom, the division won’t actually happen for some time: the SNP claims it will take 18 months, but most people are certain it will take rather longer. Assuming no extraordinary events, that gives plenty of time for you to move your money after the vote.

The fact that so many people are worried about this now – many months before the vote – should, however, make those planning to vote against the UK feel a little nervous. A new report out from Deutsche Bank outlines just how nervous. There will, says the report, be a “substantial amount of negotiation” to be done, with the “most important financially” being “the choice of monetary regime, allocation of oil revenues and apportionment of national debt.”

The negotiation period could easily turn into one reminiscent of those seen in eastern European countries following the collapse of the Soviet Union: money would flow “unchecked” (assuming no capital controls) out of Scotland as its new government worked to persuade another government who have already made it clear they don’t want to share a monetary regime to share a monetary regime.

Would Moneyweek readers join that capital flight? My guess is that they probably would – why take the risk of leaving your cash in an institution in a country that is about to be foreign with an as yet unknown currency system and regulatory authority, when you could bring it home?

(This matters by the way – 66% of all Isas and 70% of all pensions sold by Scottish companies are sold to people resident outside Scotland.)

  • CityFarmer

    In a nutshell my view would be ‘why take the risk’ not just Scottish asset managers/ stocks, but more ( especially ) houses, land, cash savings. Unless there was a substantial tax or return advantage there would just be no point having the additional tax, political, FX risk in putting/leaving assets in an independant Scotland.

  • Steve T

    Oh dear. This article doesn’t comply with the SNP rule book which requires slavish adherence to everything Salmond states, even if that means demanding the sun rises in the West. Although it is clear to any sensible person that voting for independence is akin to shooting oneself in the foot with a bazooka, be prepared for the nationalist backlash.

  • Greg

    …but people already keep money in banks which are foreign? Providing there are no withdrawal restrictions put in place and there are Government assurances that the £85k protection will still be in place (which they should do, given the close ties which will still exist) I don’t see a problem.

  • James JSM

    As regards residential property in Scotland, it’s probably already too late to “take the money and run” to safety south of the border. My wife and I are English but have been living in the Scottish Highlands for the last 13 years. There are clear indications that property values here are pretty stagnant at present and will, I suspect, plummet if there is a “Yes” vote in September. We are desperately hoping that the vote will be “No”!

  • Greg

    My dad has been trying to sell his house in Scotland for 6 years – he is hoping for a “no’ vote but I can understand why so many Scots might vote “yes” .

  • FeS2

    Indeed, but Iceland offered such guarantees on a relatively (to Scotland) smaller financial sector and reneged on the deal – a guarantee won’t be honored if it turns out it can’t be. (Equitable Life anyone….)

  • Zengas

    Yet another topic about which there is little debate and no clear agreement. Take ISA’s for example. Curious, I called my Scottish based ISA provider who claimed a YES vote would make no difference to operations for customers based outside Scotland – and for Scots all the former ISA rules etc would no longer apply because of course Scotland would no longer have the same taxation system. I expect they are correct, but this is just one more example of the very great complications that appear the moment you get under the hood.

  • d2-d4

    This goes to the heart of the difficulties for the Independence side of the argument. For the zealots, any upheaval is worth it, and all attempts to raise these kind issues are treated as scaremongering.

    This is fine for zealots and the very convinced but for many people this is very real and very important stuff…. whatever the rhetoric between now and September we are close enough now to see real data coming through, real things happening with real companies in the real world as to what reality is going to be…rather than just hearing the already tiresome, hectoring, predictions.

  • CityFarmer

    Of course some people keep money in foreign bank accounts. My point is/was that very few people do. And when they do they expect some form of compensation for the FX, regulatory and political risk incurred usually in the form of a higher interest rate.

    Does a post independence Scotland have the economic capacity to cope with either substantially higher interest rates than the remainder of the UK, or a massive capital flight from it’s vitally important financial service sector?

  • CityFarmer

    I could see a scenario where Soctland sees high interest rates combined with high inflation as the currency, lets call it the Och, falls even as interest rates are raised in a bid to halt the capital flight.

    All of this to win indpendence, where independence actually means independence as a minor European region, exchanging the relatively strong UK bargaining position for the minimal influence of an Estonia sized state.

    It is actually completely mad. The only winners would be the English, and the conservative party.

  • David G

    As a Scot living in Scotland and who is presently undecided on the question of independence this is precisely the sort of article which pushes me towards voting yes, despite having over £300,000 in an Isa with Alliance Trust. People like City Farmer just don’t get it. Scots are thoroughly sick of being told that we’re too wee, too poor and too stupid to run our own affairs or make our own decisions. Given the UKIP situation and Cameron’s pledge of an in-out referendum on EU membership there is a lot of force in the argument that if Scotland wants to remain in the EU the best course is to vote for independence. There are huge issues at stake like getting nuclear weapons off Scottish soil and Scots no longer being at risk of getting dragged into illegal Anglo-American wars. The mistake that City Farmer and many other make is to assume that an independent Scotland will have the same priorities as the current UK. It won’t – we won’t be spending a penny on replacing Trident or on vanity projects like HS2 trains which don’t come within 100 miles of Scotland and these are only the two most obvious examples.

    I agree with much of what d2-d4 says but to describe those many thoughtful, politically engaged Scots who are seriously considering voting yes as “actually completely mad” is deeply insulting

  • quark

    David G, whoever said that you are too wee, too poor and too stupid, to run your own affairs? Personally, I think it would be a shame for Sotland to break away; but if they do, at least base it on rational reasoning, not on a hatred of Tories, or on counter arguments that “they are bluffing” or that “nothing will change”, which is patently untrue. Or on imaginary thoughts about English prejudices. However, at least Scottish independence will solve “the Midlothian question” and do away with the “Barnett formula”.
    On the question of a flight of Capital, I also have considerable funds width Alliance Trust Savings, as well as Barclays Stockbrokers, whose call centre is based in Scotland. Alliance have already said they are setting up a company in England, as have other financial companies. Were they not to do so, my business would go elsewhere.
    I do find it ironic, that Poles, Romanians and other immigrants will be allowed to vote, but that Scottish born residents in England, Wales or Northern Ireland will have no say.
    Scotland has got a thriving Financial Services industry. I guess that Independence may weaken it. And after all, it’s an industry that would last longer than North Sea oil on which it seems, Salmond is basing all his hopes, as far as revenue is concerned.
    I hope Scotland stays within the UK, but if it doesn’t, then my guess is, that The City of London will benefit.

  • David G

    “I do find it ironic, that Poles, Romanians and other immigrants will be allowed to vote, but that Scottish born residents in England, Wales or Northern Ireland will have no say.”

    Don’t forget that by far the largest immigrant group in Scotland is the English all of whom will be able to vote if they so choose. Recent press comment has suggested that English voters could well deliver a no vote.

    The trouble about the Scottish ex-pat argument is where do you draw the line? If my Scottish born cousin in London, who has no intention of every returning to Scotland, is allowed to vote why not my equally Scottish born sister who lives in Munich but plans to come back to Scotland when her husband retires in three years time?

    “Imaginary thoughts about English prejudices”. Really? We’ve imagined being called “subsidy junkies” and all the rest of it over the years? We’ve imagined people who should know better repeatedly talking about “England” instead of Britain, as in “England won WW2”? Just a couple of weeks ago I heard Kate Silverdale on the BBC news refer to the late Elena Baltacha as the “English” tennis number one. Baltacha was born in the Ukraine, brought up in my home town of Perth and considered herself Scottish.

    As I said, I largely agree with d2-d4 and I am totally turned off by the blind optimism verging on dishonesty of the Yes campaign. It may sound perverse but I’d probably be more likely to vote yes if they were more prepared to be frank about the potential problems. “It will happen because Alex Salmond say it will happen” is hardly a sound basis for breaking up the UK. On the other hand there are many rational reasons for Scotland to seek independence including, as I’ve already mentioned, getting rid of nuclear weapons and ensuring that we remain in the EU.

    Whatever happens in September the UK landscape has changed forever.

  • EM99

    No it is obvious that the editor is right about this. I’d rather stick with a tied a trusted regime like the UK govt and their decisions.
    G Osborne (Consistently fails to balance a budget. Privatise R Mail, allowing the best man at your wedding’s company to make £ms while undervaluing the company who now threaten to end universal delivery.)
    D Cameron (Privatise NHS in England, just watch admin costs go up and standard of care down).
    Gordon Brown (couldn’t balance a budget)
    Tony Blair (illegal war, lied and deceived)
    John Major (privatised railways, pension debacle)
    Margaret Thatcher (failed to set up an oil fund, joining Iran as the only country where major petro chemical resources have been found and have not set up a fund).
    No, we may have lost an Empire but as long as we keep the UK together that is what matters. Scotland is a nice place to visit (for the festival) or even to live but they couldn’t run their own affairs. It’s best left to Westminster. They know best.