Some of the key points for Scottish business in the Scottish Government’s Guide to an Independent Scotland will be the proposals for competition, economic and financial regulation. The design of a regulatory system is only partly a ‘structural’ aspect of independence, as it would be something future governments could alter just as the UK Government can do now. However, we can probably assume that the regulatory system would, in the event of a ‘yes’ vote, be put in place by the current Scottish Government in the 18 months between the referendum and independence day, and that successor governments would not want to radically overhaul that for at least a while. The Guide’s proposals are therefore likely to reflect the structure that would be put in place, at least where those proposals would be entirely within the control of the Scottish Government.
Competition and economic regulation
That is certainly the case for sectoral regulation in energy, post, telecoms and media, and some elements of transport, which the Guide proposes combining with the existing devolved water regulator in a “combined economic regulator”. References to that are spread throughout the Guide (pages 100, 115, 131, 298, 320, 324 and 363, and questions 83, 86, 97, 100, 102 and 437 in the ‘Q&A’ section), reflecting the wide remit the regulator would have. Interestingly, page 363 refers to the functions of the regulator being “progressively expanded” over time, which suggests that other sectors could be brought within its remit.
The details of the regulatory model are sparse in the Guide, which instead frequently refers back to the Scottish Government paper (“Economic and Competition Regulation in an Independent Scotland”) that originally set out the proposals. Mark blogged in February on the launch of that paper, which at the time suggested a single Scottish regulator that would replace not only the various UK sectoral regulators (OFGEM, OFCOM etc.), but also – as the title of the paper suggests – the competition functions of the OFT and Competition Commission (which are of course themselves to be combined in the Competition and Markets Authority as of April 2014).
However, a subsequent paper was published in August (“Consumer Protection and Representation in an Independent Scotland”) that appeared to contradict those earlier proposals by advocating instead for a separate body that would combine competition regulation with consumer protection functions (much as the OFT does now). It suggested a single national Consumer Ombudsman, which would integrate consumer protection, advocacy, education, advice and enforcement for all sectors, and support the agencies responsible for economic regulation, competition regulation and consumer protection (with a preference to combine the latter two). Gemma noted the details at the time, including the apparent inconsistency with the earlier proposals.
The Guide appears to be consistent with that latter paper in respect of competition regulation – it refers at page 100 to a “combined regulatory body … on competition and consumer issues”, and at question 76 to “a competition authority” – rather than the earlier one. It doesn’t expressly acknowledge the inconsistency, however, so the Scottish Government might usefully be asked to confirm exactly what structure it now has in mind for competition regulation in the event of independence, particularly as it is an issue that would be entirely within their power to decide if there is a ‘yes’ vote.
The proposals for financial regulation, by contrast, are inseparable from the Scottish Government’s preference (indeed, the only option they say they will countenance) of a currency union between an independent Scotland and the rest of the UK (“rUK”). The financial regulation proposals are dependent on such a union being agreed with the rUK, which as Charles and Gemma explained yesterday cannot be guaranteed.
The Guide’s proposals (dealt with in Chapter 3 alongside currency, at pages 112-115) nevertheless assume that a currency union would exist, and on that basis deal with two main areas: (1) financial stability (regulation of the safety and soundness of financial institutions); and (2) financial products and protecting consumers (regulation of the conduct and behaviour of financial institutions). The Guide states at the bottom of page 112 that an independent regulator would be established, as in other EU countries (perhaps an implicit acknowledgement of the need to designate a national regulatory authority under EU law), but then proposes that financial stability would continue to be dealt with on a consistent basis across the ‘Sterling Area’, with the Bank of England’s Financial Policy Committee setting macroprudential policy and identifying systemic risks. That is in contrast with the proposals for prudential regulation of deposit takers, insurance companies and investment firms, which would be conducted by either a single Sterling Area authority or the regulatory arm of a Scottish Monetary Institute working closely with an rUK counterpart. The Guide suggests that the Bank of England would act as lender of last resort and be accountable to both Scotland and rUK, which is consistent with the logic of the Sterling Area proposal.
For conduct regulation, however, the Guide proposes a separate Scottish regulator to assume the key responsibilities of the UK Financial Conduct Authority, though working on a “closely harmonised” basis with rUK regulators to allow firms to continue to offer products on a cross-border basis. The Guide also indicates that financial services compensation schemes would continue (as they would have to under EU rules, at least in respect of bank deposits), with the Scottish Government seeing “merit” in a joint or coordinated scheme across the Sterling Area.
These proposals are not especially surprising, having been largely set out in the report of the Scottish Government’s Fiscal Commission Working Group back in February, on which we have commented previously. The key point, however, is that these regulatory proposals are inseparable from the proposal for a currency union with rUK, and so entirely dependent on agreement being reached on that. The key co-operative elements of the financial regulatory system would also be dependent on the outcome of the negotiations that would follow a ‘yes’ vote. They are therefore not proposals that the Scottish Government could unilaterally deliver without the consent of the UK Government.
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On November 27, 2013