The answer is, nobody knows. At one extreme, you can believe that the UK will negotiate a deal with the EU which will allow free trade with the single market, no free movement of people, no EU regulation, and no fees – so trade will continue as at present. At the other extreme, you can predict that negotiations will be tough, and that the EU will not countenance a better deal for the UK outside than inside the EU – or that there will be no deal at all. Perhaps a deal will be struck somewhere in the middle, with the EU conceding passporting rights for Financial Services to the single market – in return for what, exactly? Scotland’s energy or fishing resources? And if that looks likely, will Scotland leave the UK in the interim? And in that scenario, will it be able to remain in the single market with the same rights as it did within the UK? Would the EU prefer Paris or Frankfurt as its financial hub? Banks are already moving thousands of jobs out of UK. Will bankers get a special deal?
What is for sure, is that the stakes are high. The UK is the world’s largest exporter of financial services, with exports worth £77.5 billion in 2015. The sector – which includes banking, insurance, accountancy and asset management – employs more than 2.2 million people and accounts for 8% of the UK economy (and £66bn in tax receipts). Warnings have been made of 232,000 job losses and a hit to 5,500 companies. Scotland has 157,000 people employed in financial services.
Currently, a UK financial services business is able to provide a range of financial services anywhere in the EU, and in the wider European Economic Area (EEA), while being based in the UK and regulated by UK authorities. This is because they have ‘passporting’ rights which allow them to offer financial services to the rest of the EEA (28 EU members plus Norway, Iceland and Lichtenstein) while only having to follow one set of regulations. The European Commission could also introduce EU passporting and lower regulatory requirements for financial technology firms, moves that could undercut London’s leading position in “fintech” (using modern technology to compete with traditional financial services providers).
Soft Brexit: If Scotland remains in the EU single market, ‘passporting’ rights need not change. This implies membership of EFTA and/or EEA: a free trade zone with access to the EU’s single market. Norway, Iceland and Liechtenstein are in EFTA and EEA (Switzerland is in the EEA). EU single market rules and regulations are implemented, with little say on what they are. Free movement for EU citizens applies, and they pay into the EU in the same way as EU members. This seems a good first option for an independent Scotland – we could become an attractive Gateway to Europe for the UK Financial Services sector, which could provide a transformational economic boost in business activity and up to 100,000 high-quality jobs.
Hard Brexit: Passporting rights could be included in a bilateral trade agreement between the UK and the EU. For example, Switzerland currently has a bilateral agreement allowing Swiss general insurers to set up establishments in order to provide limited financial services across EEA countries (although it still has to set up offices within the EU, apply EU rules, accept free movement and pay the EU money). This seems to be the preferred destination of the UK, but it seems unlikely the UK will be offered access on the basis of regulatory equivalence – it would be a threat to EU financial stability (currently, 30-45% of trading in euro-denominated assets is done out of London).
No Deal: Passporting rights will be lost if no trade deal is made between the UK and the EU. This could be mitigated by relocating some services to another EU country in order for businesses to maintain the same level of services in the EEA, but there are costs associated with that, plus economic uncertainty in the short term. World Trade Organization (WTO) is where the UK will end up if no deal is done with the EU. The UK is already a WTO member (in the EU), but will need years to re-negotiate its membership terms and negotiate new deals with countries it already has EU arrangements in place for. It could not depend on obtaining as good terms as the EU currently has.
In an independent Scotland, it will be the people of Scotland, and their Scottish Government, who will decide our future policy on Europe, and which of the trading options is in Scotland’s best interests.