CHALLENGES AND OPPORTUNITIES
We find ourselves in a time of unprecedented change in the global financial services industry. The interventions by Governments throughout the world have initiated changes to the structure and governance of financial institutions. Prior to the developments in the last few years, these changes would have been unthinkable, not only in the USA where there are significant fears concerning "public ownership" of financial institutions, but also in the UK where the part-nationalisation of some banks has led, for example, to the UK Government having to set up a new organisation - ( UKFI) which will manage the Government's shareholdings in banks which have been involved in the recapitalisation plan. It is being run on a commercial basis at arms length from the Government. It is also responsible for disposing of the UK Government's investments in a manner consistent with HM Treasury's stated aims that it should not be a permanent investor, maximising sustainable value for the taxpayer and taking account of risk.
Interventions in the financial services sector
The significant interventions undertaken by governments across the world, while stabilising and supporting the global financial system will also have implications more widely and over the long term. Considering the interventions that have taken place in the UK (as outlined in the paragraph above and here) there are impacts likely to be felt in a number of ways:
- The impact on public sector budgets;
- The impact on the wider economy;
- The impact on savers, shareholders and other customers (e.g. mortgagees); and
- The long term effects of borrowing by the UK Government on the economy as a whole.
At Budget 2009 the UK Government published provisional estimates of the cost of the various financial interventions suggesting that they may ultimately incur a loss of between £20 and £50 billion (1.5% - 3.5% of GDP) as a result of their financial market interventions. When these unrealised losses are included in the public finances, HM Treasury forecast that UK net debt will peak at 79% of GDP in the UK in 2013-14 compared to 76.2% when they are excluded. However, such forecasts are subject to a wide margin of error. Recent estimates by the IMF suggest that the final cost of the UK Government's financial market interventions could be around £130 billion (9.1% of GDP).
It should be noted however, that the vast majority of the overall recent deterioration in the UK public finances has stemmed not from the direct interventions to support the financial services sector but from the general slowdown in the UK economy and accompanying fall in taxation receipts.
Like the UK and many other advanced economies, the Scottish economy entered recession as the impact of the international financial crisis spilled over into the real economy. Although initially concentrated in the sectors linked to the housing market (e.g. construction, estate agents, legal services), all sectors within the Scottish economy have been affected by the downturn.
Weaker activity resulted in a marked deterioration in conditions in the Scottish labour market, with unemployment rising sharply since the start of 2009 (up to 7.4% in Sept-Nov 2009, from 5.2% in the same quarter a year previous).
Much time and energy has been spent, across the world, in considering what actions need to be taken to ensure that future difficulties in the financial services industry cannot spread and impact on other sectors of the wider economy. Many believe that actions cannot be taken in isolation at a national level and institutions such as the UK Government, EU and G20 are currently seeking agreement on the way forward. It is difficult therefore to accurately gauge at this point what this might mean for Scotland's financial services industry.
Shortly after the announcement proposing the Lloyds TSB takeover of HBOS the Office of Fair Trading in its report of 24 October 2008 (published on 31 October 2008) outlined concerns that it may lead to significant lessening of competition. If it does, this could be of serious concern to Scottish depositors (both retail and business) and have wider implications for the structure of the financial services industry in Scotland over time. However, in the statement from the European Commission announcing the restructuring of several banks across Europe (the UK plans are outlined in more detail below), the EU Competition Commissioner noted that the proposed divestments in the UK retail market were 'substantial and will improve competition in the long run'.
Changing shape of the financial services industry
In light of discussions with the European Commission and institutions' own efforts to cut costs and rebuild balance sheets, restructuring of financial institutions is ongoing.
Restructuring announced by RBS and Lloyds so far include:
- RBS Restructuring: aims to save £2.5 billion per year; the bank to be separated into two arms - with riskier assets and operations grouped together. Overseas business to be cut back, with its operations to be reduced or sold in 36 of the 54 countries it works in. It will restructure as a premier financial institution anchored in the UK and it will "centre on the UK with tighter, more focused, global operations".
- Lloyds Banking Group: the restructure required to combine two large organisations will result in job losses as posts are combined - in its shareholder circular in advance of the acquisition of HBOS, the Lloyds TSB Board stated it believed it will deliver total annual pre-tax cost savings greater than £1.5 billion by the end of 2011. Announcements by the Group to date have involved changes to both Group Operations and Insurance Division. The group has also announced it will retain the Scottish Widows brand and concentrate pension and investment activity in Scotland - indicating the underlying strength of Scotland's reputation in financial services.
Banks which have received assistance from the UK Government are also subject to decisions around EC State Aid:
- The European Commission ( EC) recognises that state intervention has been necessary to secure the future of aided banks and allow businesses continued access to finance.
- Support schemes across all Member States have been deemed compatible with State Aid regulations subject to certain conditions, namely that measures are:
- well targeted and proportionate;
- time limited to address acute crises without creating long term reliability on state funds; and
- coupled with adequate private sector contributions by way of adequate remuneration for state support.
- It is the view of the EC that aid measures must be followed by restructuring of aided institutions and the financial sector as a whole, to preclude the need for further bailouts. Further, wider regulatory reform and cultural change in financial institutions should be pursued with a view to returning the banks to self reliance whilst ensuring long term sustainability and protecting the interests of taxpayers and non-aided competitors.
In keeping with the above, a number of banks across Europe (including KBC in Belgium, and ING in the Netherlands) have been in discussions with the European Commission on their restructuring plans. As outlined on 3 November, the plan for RBS involves the sale of its insurance arm, its branch network in England and Wales, NatWest branches in Scotland and its Williams and Glynn brand. The Lloyds Banking Group divestment plan involves the sale of at least 600 branches across the UK, with the associated accounts and mortgages.
EC approval for the Lloyds divestment plans was announced on 18 November 2009, followed on 14 December 2009 of approval for the RBS plans.
While these plans provide both challenges and opportunities for Scotland's economy and for the financial services industry in Scotland, until more detailed plans are set out for each divestment strategy its difficult to arrive at clear implications for the sector in Scotland.
The Scottish Government's main and immediate concern is to ensure there is not a loss of key functions and employment in Scotland either directly or indirectly. The Scottish Government has therefore established the Finance Sector Jobs Taskforce to co-ordinate efforts across Scotland to ensure maximum levels of employment are retained within the financial services industry, focusing on understanding the needs of the industry as it adjusts to the future structures which will emerge as a result of the current climate. There are also concerns about maintaining Scotland as a perceived attractive business location for financial services companies notably around the reputational effect of the HBOS and RBS problems.
To summarise, the challenges in the financial services industry relate to the current international financial crisis and the recession. These challenges are both immediate and potentially longer term, for example, the restructuring plans agreed by the EC for banks as a condition of receipt of State Aid, could take four years to realise.
- For individual financial services companies there is concern about the impact on the profitability and value of their individual organisations.
- The capital injections provided to banks by the UK Government are intended to stabilise the sector, though it will be some time before the full implications of the crisis become clear.
- In the medium term, there are likely to be regulatory changes to the financial services sector and the EU and international dimensions of these changes may mean that financial services companies will be dealing with their requirements for some time and they could impact on the structure of some companies.
- The impact on the wider economy is still an ongoing concern. Although conditions in financial markets have stabilised, credit availability still remains constrained and is a major risk to the both the timing and the scale of the global economic recovery.
- Employment in financial services - and indeed business services - have come under strain, although to date the job losses in the financial services industry have not been as significant as first thought and have been mitigated to a great extent by recent job creation announcements. It remains to be seen whether the quality of jobs gained and lost are of equal volume or whether the mass of higher value added jobs in the financial services industry has been negatively impacted. Restructuring at both RBS and Lloyds Banking Group may still produce significant job losses in the industry.
- In the medium and longer term, significant job losses in financial services will reduce the skills base of its available workforce and constrain the sector's capacity to grow.
- There are significant risks to the reputation of Scotland's banking sector given high profile government intervention in RBS and HBOS.
As well as being a significant challenge to the financial and business services sectors, the current financial situation also presents opportunities in the medium and long term. The main Bank of England interest rate now stands at 0.5% and the significant help provided to banks with taxpayer funds was made on the condition that credit availability would return to 2007 levels. The trading environment is of course still very challenging and credit availability still remains constrained to both businesses and individuals. However the IMF has stated that the unprecedented interventions by Governments across the global economy have helped reduce the risk of a systemic collapse in financial markets. Monetary and fiscal measures introduced by governments have helped mitigate the scale of the downturn through stimulating demand.
Businesses, in both the financial and business services sectors, could have an opportunity to exploit this easing of market conditions so that once some form of normality resumes, the sector in Scotland is well placed to not only recover but to grow and expand. The ability to do so is dependent upon meeting those challenges above particularly those related to reputation, the skills base and capacity. This also creates opportunities for new inward investment. Scotland has always positioned itself as a low risk, lower cost location where companies can take advantage of the existing infrastructure and assistance available to achieve operational cost efficiencies and saving. Where firms are being driven to reduce costs, this gives Scotland an advantage for any company wishing to expand and grow its business here.
For business services specifically, there are further opportunities for the sector in terms of the support services that can be provided to other growth sectors, such as life sciences and creative industries for example (particularly for patent/management consultancy for example). Furthermore, the proposed Scottish legislation allowing alternative business structures within the legal profession may well provide opportunity for growth.
Meeting Challenges and Identifying Opportunities
What is becoming clear is that we need to be able to identify all of the challenges and opportunities which may present themselves. Co-ordination of this across the economy might prove difficult, but the Financial Services Advisory Board ( FiSAB) has an opportunity to take the lead. FiSAB has most recently decided to refresh its membership, to better represent the different sub sectors in the industry operating in Scotland. It also decided to invite representatives from the Bank of England and the Financial Services Authority ( FSA) to attend meetings when appropriate. The Financial Services Implementation Group ( FiSIG) has undertaken a "scenario planning", facilitated by experts from the Universities of St Andrews and Edinburgh to identify a range of possible future scenarios and actions which might mitigate risks and capitalise on opportunities created by these scenarios. These actions were, in turn, sense checked against current plans and high level objectives. It was concluded that the actions continue to fit the current pillar structure of the Strategy for the Financial Services Industry in Scotland and that the Strategy and the work of FiSAB is increasingly important.
Public Sector Interaction with the Key Sector
While the sector as described in the GES encompasses business services, the vast majority of the work undertaken to date by the Scottish Government ( SG) and public sector partners is in the financial services arena, with the Financial Services Advisory Board ( FiSAB), set up in 2005, representing a key collaboration between the SG and the financial services industry.
Financial Services Advisory Board ( FiSAB)
- FISAB is a collaboration between SG, SE, SDI, Universities Scotland, Scottish Financial Enterprise ( SFE); Unite the union and the financial services industry. It is chaired by the First Minister and representatives from HM Treasury have observer status.
- The Board delivers the
Strategy for the Financial Services Industry in
The Strategy for the Financial Services Industry in
sets out the vision for "An innovative, competitive and
thriving international financial services industry in Scotland,
underpinned by world-class infrastructure and universally
recognised as a leader on the global stage". In particular, the
key strategic aim is to "exploit market opportunities through
innovative products and services". This industry-led strategy
recognises three areas for action under the following headings:
- People and Skills: skills and labour market development, raising the appeal of the industry as a career choice, financial education in schools;
- Profile: further developing the proposition for the industry in Scotland, raising the profile of Scotland as an international FS centre, attract value added foreign direct investment ( FDI), engage meaningfully with key stakeholders such as FSA, EU, UK T&I and HM Treasury;
- Infrastructure: transport and connectivity, communications, city collaboration, support for innovation, university collaboration and supply chain development.
- The Strategy for the Financial Services Industry in Scotland 8 sets out the vision for "An innovative, competitive and thriving international financial services industry in Scotland, underpinned by world-class infrastructure and universally recognised as a leader on the global stage". In particular, the key strategic aim is to "exploit market opportunities through innovative products and services". This industry-led strategy recognises three areas for action under the following headings:
- During 2008, the FiSAB partnership delivered the Global Financial Services Week in Scotland which aimed to cement Scotland's position as a leading centre of the international financial services industry. The week included the inaugural global financial services conference which took place in Edinburgh.
Financial Services Implementation Group ( FiSIG)
- FISIG is a working group which mirrors the membership of FiSAB. It is tasked with ensuring the implementation of the strategy.
- The Financial Services Team in SG focuses on working with FiSAB and provides secretariat support for both FiSAB and FiSIG.
- SE works closely with the leading industry body, SFE, to promote the sector within Scotland, UK and internationally. SE also link with colleagues in UK Trade & Investment's Financial Services team.
Scottish Enterprise's International Advisory Board
- In August 2002 SE established the International Advisory Board ( IAB) where members are invited to join in recognition of their experience, positions of international prominence and influence in their respective industries - including financial and business services - and their willingness to contribute to Scotland's wealth creation agenda.
- Chaired by Crawford Gillis, Chairman of SE, the IAB complements the role of the SE Board by contributing international business advice and market development perspective to Scotland's economic development drive.
- The IAB has met bi-annually since inception. At these meetings members provide advice on strategy, guidance on key landmark projects and support to Scottish companies with significant international potential.
Business Experts and Law Forum ( BELF)
- The BELF, established to see what could be done to enable and encourage businesses, so far as possible, to choose Scotland as the seat of their business and legal activities; to look to Scottish lawyers for their advice; and to look to the Scottish courts as their dispute resolution forum of choice reported in November 2008.
- Its report identified as priorities:
- Reforms to the courts and arbitration which would create opportunities to attract dispute resolution business - and reduce costs and risk for business in Scotland.
- A communications strategy which promotes Scottish legal services alongside other business services as part of a highly qualified and expert economic infrastructure which actively assists business.
Regional Selective Assistance ( RSA)
- SE provides support to firms across a wide range of sectors through its RSA grant scheme.
- Over the last five financial years, £38 million of RSA support has been provided to some of Scotland's most prominent financial and business services companies.
- SMART: SCOTLAND provides financial support to firms to support Research and Development (R&D) projects.
- Over the last few years, SMART: SCOTLAND has funded early-stage R&D projects aimed at providing technology to assist financial services firms.
Since 1 October 2009, SE has been responsible for the administration of the RSA and SMART: SCOTLAND grant schemes. Both of these schemes were formerly administered by the SG.
Finance Sector Jobs Taskforce
- Established following agreement in the Scottish Parliament, and reporting through the FiSAB structure, the Taskforce is chaired by SE and both SG and SDI are members. Collective understanding of the range of public sector interventions available and different partnerships across all three organisations has enabled a small, focussed team to be set up including representatives from SDS and the Scottish Funding Council. The Taskforce also has industry representation in the form of Scottish Financial Enterprise and Unite the union as well as representatives of local authorities through CoSLA.
Scottish Enterprise ( SE)
- Following the re-focus of SE, activities have concentrated on boosting enterprise, innovation and investment across its key sectors industries.
- The main areas of operation within financial services are outlined below:
- supporting the development of growing businesses through account management;
- working with Scottish businesses to help them take advantage of opportunities to be part of the supply-chain of the major financial institutions (with a focus on technology suppliers;
- working with businesses to assist their expansion into international markets; and
- helping to attract senior staff in areas of recruitment difficulty through the work of Talent Scotland.
- facilitating industry-university collaboration in areas such as informatics; and
- increasing awareness of support for innovation in the sector and across the supply chain.
- raising the profile of the financial services sector in Scotland to attract high value FDI and working with existing investors to retain and grow their operations;
- utilising previous physical investment in Glasgow's International Financial Services District to help attract new businesses to Scotland and accommodate the growth of existing businesses;
- internationalisation of Scottish financial services companies
- working with financial services businesses to increase the supply of risk capital to growth businesses through initiatives such as the Scottish Co-investment Fund; and
- working with the industry to articulate its need for enhanced connectivity, including links between Glasgow and Edinburgh and international flights. In addition, SG officials maintain engagement with colleagues in Transport Scotland on the evolving Strategic Transport Review.
Highlands and Islands Enterprise ( HIE)
- The financial and business services sector is a relatively new area of focus for HIE, however one which is important to the economy of the area, therefore HIE's focus is on providing the most appropriate methods of support to help the sector continue to grow in the future.
- HIE has a clear emphasis on the business services element of the sector in the Highlands and Islands. This includes activities within the scope of the Financial and Business Services sectoral description set out here, including e.g. Management Consulting, Security Services and Advertising in relation to business services and banking and insurance in relation to financial services. In addition, HIE has identified opportunities for growth in developing the broader business services sector including the contact centre sector, homeworking business models, the green data centre market and further growth of knowledge-intensive services such as the ICT supply chain.
- Since the 1990s HIE has however invested significantly in infrastructure that is crucial to financial and business services, and this was key to securing a number of inward investment projects for the Highlands and Islands which continue to enjoy success in the area.
- HIE is currently developing a clear sectoral strategy congruent with the national vision for financial and business services. Good relationships are being established with SG, SE, SDI and SDS colleagues; with HIE actively involved in community of practice and training activities for sector teams.
Scottish Development International ( SDI)
- SDI was formed in 2001 to attract FDI to Scotland. SDI has a specific Financial Services Team, which also has membership of FiSIG.
- Funded entirely by the SG, SDI is a joint venture between the SG and SE and brings together the resources and capability of both organisations to deliver support for companies investing in Scotland and for domestic companies looking to internationalise.
- SDI has staff in 21 offices throughout the world including the UK, mainland Europe, North America and Asia.
Skills Development Scotland ( SDS)
- In April 2008, the new skills body, SDS, took over responsibility for addressing skills issues by actively promoting financial services as a career choice and by working with the industry to attract a wider range of people. This role had previously been fulfilled by SE and Careers Scotland. SDS has now implemented new structures to work towards achieving the SG's purpose and has appointed a specific Financial and Business Services sector Manager.
- SDS is in the process of developing its offer to employers and the Sector Manager is making connections to ensure a strong voice for the sector in the shaping of SDS' products. Successful legacy products are continuing such as "Stock Market Challenge", and awareness raising programme which will engage S3 pupils in 125 schools.
- On 31 August 2009 The First Minister unveiled plans for 460 new financial and business services apprenticeships across Scotland. These places are being backed by £549,000 funding, as part of the SG's skill support package, ScotAction, which is being taken forward by SDS. 450 of the new Modern Apprenticeships have been allocated with 345 of them available to adults in response to industry demand.
Financial Services Skills Council ( FSSC)
- The FSSC is an independent, employer-led organisation that provides strategic leadership for education, training and skills development for financial services, accountancy and finance across the UK.
- Like all Sector Skills Councils ( SSCs), they have a lead role in vocational qualifications and in collating and communicating sectoral labour market data as well as raising employer engagement, demand and investment and considering collective measures.
- All SSCs are licensed by the Secretary of State for Innovation, Education and Skills, in consultation with Ministers in Scotland, Wales and Northern Ireland and on the recommendation of the UK Commission for Employment and Skills.
- The FSSC has not succeeded in gaining relicensing at this point and is currently undergoing a management review. Liaison in ongoing with SDS and the Skills Gateway Initiative as part of this.
- In May 2008 the First Minister announced an industry-led ( CBI Scotland inspired) initiative which is developing a proposal to deliver a Skills Gateway for financial services.
- The First Minister has received the proposal for the Skills Gateway and the SDS Financial and Business Services Manager is working with key partners to take forward actions on roles and responsibilities, governance structures and delivery. Consultations have taken place with key industry figures and the FSSC team with a view to streamlining structures. The outcome of the re-licensing process will be pivotal.
Regulation and Compliance Issues
Regulation of the financial services industry in Scotland is a reserved matter at both UK and EU level. FiSAB can act to provide a collective "Scottish Voice" on Regulatory matters, though to date this has tended to be done by individual companies or separate groups (e.g. the Committee of Scottish Clearing Banks) working with the SG. The global nature of the financial crisis has led to international calls for changes to regulation and governance of financial institutions and for international co-operation on these matters. Both the EU and the G20 are currently considering a number of issues and the UK Government is expected to announce its plans for the industry following delivery of commissioned reports on regulation and governance issues.
The legal system
The key area of regulation which is primarily devolved is the court and legal system. The Civil Courts Review led by Lord Gill reported on 30 September 2009. While there has been welcome progress in areas such as the development of commercial courts, the report identified significant problems of delay and expense which can impact negatively on Scottish business. The Government will now work with the courts to restructure and reorder the work of the courts, enabling businesses to litigate in a more efficient legal system. This will be done alongside existing initiatives to promote cost-effective solutions to disputes outwith the court system, such as the Arbitration (Scotland) Bill and the development of a Scottish centre for Alternative Dispute Resolution.
The SG is also liberalising regulation of the legal profession itself, through the Legal Services (Scotland) Bill. This will remove restrictions on the type of business structures open to solicitors, opening the way to greater innovation in the legal services market. As well as creating more opportunities for the Scottish legal profession, this has the potential to support better, more holistic services for the wider financial and business sector, in areas such as regulatory compliance, risk management, mergers and acquisitions, and so on.
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