Scotland votes for independence from Great Britain in less than a week. Until the past few days, the result seemed like a foregone conclusion, as the “no” vote, (led by the Better Together campaign, backed by the three major UK parties) held a significant lead. However, as the referendum draws clear, the “yes” vote, led by Yes Scotland has significantly narrowed the gap. In one poll, it even took the lead.
So, if Britain wakes up one country short on Friday, what could that mean for corporate treasurers around the world? In one word – uncertainty. However, take solace that you won’t be alone. A KPMG survey released in July showed that only 16 percent of British companies had made a contingency plan for an independent Scotland1.
One of the biggest reasons for companies’ lack of planning is that the financial future of Scotland is far from clear, in particular on the topic of currency. While the “yes” campaign says that they will continue to use sterling as part of a currency union with the rUK (the rest of the UK), the British government says that this won’t be the case. Should this be tenforced, instead of a bluff by the government to encourage Scottish businesses to back them, it could throw the economies of both Scotland and rUK into turmoil – in fact the mere prospect of independence has caused considerable jitters for the pound over the past few days.
If a currency union doesn’t take place, Scotland would have three options – use sterling independently of London, join the euro or create a whole new currency. All of these options have both pros and cons2, and each will throw up a number of issues both before and after independence becomes final.
Given all of this uncertainty, nobody knows what this could mean for treasurers, be they of companies headquartered in Scotland, the rest of the UK or elsewhere around the world. However, for any organization that has employees, customers, vendors or banking facilities in Scotland, myriad complex issues could arrive. A few things to consider are outlined below:
Volatility in exchange rates both north and south of the border will dominate the headlines until the currency issue is finalized. In addition, should Scotland be unable to take the two safest options of the currency union or membership of the euro, volatility could remain for several years to come, until the long-term strength of the economy and currency have been assessed. Treasurers with any dealings in Scotland (especially those with major cash positions in Scottish banks) will therefore need to ensure they hedge against this volatility in the short term, and minimize their exposure to the new currency.
Existing business relationships
What will happen to companies who have existing business relationships with Scottish organizations? Be they debt, investments, or other financial instruments, all contracts will need to be reviewed and possibly renegotiated. In particular, treasurers will need to have excellent visibility on their cash position with Scottish banks, as well as the state of their credit agreements. Should the major financial institutions, such as RBS, chose to relocate their headquarters out of Scotland, this would cause even greater nervousness, as smaller, less capitalized banks would certainly be a more risky option for companies to hold major cash positions.
Banking changes (and charges)
Any company that has operations across both Scotland and rUK will, of course, need to set up new banking relationships in Scotland, regardless of whether these relationships are with Scottish domestic banks or local branches of rUK or overseas banks. Obviously this will add extra cost, and these new accounts will need to be managed, with new connectivity processes, signatory control and so on. In addition, the need for international companies to trade a new currency will add new costs in the form of exchange costs.
New taxation laws and regulations
Many large Scottish companies, particularly those in Edinburgh’s strong financial services sector, have said that they will move to rUK in the event of an independent Scotland that sits outside the currency union, and this could have an extremely negative impact, both on employment figures and tax receipts.
Even though Scotland’s economy remains strong due to its North Sea oil reserves, the country will likely move to diversify its economy and bring in new revenues by attracting overseas companies to relocate. The “yes” campaign has already said that it will lower corporate tax rates, and this could lead to a similar situation to that in Ireland, which has positioned itself as a low-tax haven for major organizations to locate their European headquarters.
Similarly, and independent Scotland could also develop a new set of regulations for companies operating in the country, and this would create a further set of complications for any treasurer whose organization conducts business in the country.
Although the pro-independence vote says that no “plan B” is needed for its currency, and the new Scotland will continue to have a thriving economy with lower taxation rates, many treasurers will go to sleep on Thursday night with a considerable amount of concern for what the next morning’s headlines will bring. If independence does occur, it could lead to some serious questions from CFOs and treasurers around the world.
1. Scottish independence: The currency options – BBC, Sept 10, 2014
2. Scottish independence: KPMG survey says – firms ‘not planning for ‘Yes’ vote’ – BBC, July 30, 2014