First Minister’s speech to the FT International Financial Centers
First Minister Alex Salmond
7 November 2013
It’s a pleasure to speak at this forum, and it’s a particular pleasure to be speaking in Hong Kong.
Scotland and Hong Kong have ties and a relationship which go back for many, many generations. They can be seen in the pipes and drums of the Hong Kong police, complete with their Macintosh Tartan.
The thistle in Jardine Matheson’s emblem reflects the fact that the company was founded in 1832 by two Scots – William Jardine and James Matheson.
Of course, Scotland and Hong Kong both have an Aberdeen harbour. I have to say that Scotland’s Aberdeen harbour has fewer floating restaurants … but more oil support vessels.
And in 1864, Thomas Sutherland from the north-east of Scotland, was on a steamer from Hong Kong to Shantou. He read an article which in his journal he said made him think that “one of the very simplest things in the world would be to start a bank in China more or less founded on Scottish principles”. Of course, as you know, the institution he established as a result – the Hong Kong and Shanghai Banking Corporation – is now one of the largest companies in the world.
HSBC is just one example of Scotland’s contribution to financial services. The Royal Bank of Scotland was the first in the world to develop colour banknotes in 1777 – although the bank note itself was invented in China a thousand years before.
Robert Fleming established the investment trust in Dundee in 1873 – which of course played such an enormous role in the investment trust movement in the development of the United States of America. When I was a lad growing up in Scotland, I used to think John Wayne had tamed the Wild West of America – actually Robert Fleming and the investment trust was even more important than John Wayne.
The overdraft was another Scottish invention (in 1728). I have to say, however, we don’t talk about that quite as much as we do penicillin, television and the telephone. We’ll just gloss over the fact we invented the overdraft.
That record of innovation in Scotland continues to this day. The direct model of insurance provision was pioneered in 1985, and offset banking was launched by Intelligent Finance in Scotland in 2000. I want to make it absolutely clear, however, that Scotland makes no claim whatsoever for inventing financial derivatives.
The point I am making, ladies and gentlemen, is that Scotland has been a hugely influential and important financial centre for many, many generations, and – as I am going to set out in this address – we will be an even more important financial centre in the future.
In Beijing earlier this year, there was a good example of how Scotland’s reputation for professionalism, built up over these many generations, still carries substantial weight.
In June, the first Chartered Corporate Banker Qualification was established in China. It’s a qualification which has been devised by the Wealth Management Institute of China and the education company BPP. It was based on the standards set in Scotland by the oldest banking institute in the world – the Chartered Institute of Bankers in Scotland.
When you think about it, that’s quite a compliment. By 2016, we expect that 50,000 people in China will have taken a new qualification based on Scottish standards.
That adds to a growing collaboration in terms of qualifications and the development of human capital. I was delighted two days ago to be able to announce that the fifth Confucius Institute university was to be established at Heriot Watt in Scotland.
Yesterday, here in Hong Kong, I witnessed the signing of an agreement on research collaboration between the Scottish universities and the universities here in Hong Kong which together are going to have one of the largest weights of research in renewable energy and life sciences – two of the subjects that are going to dominate the coming generations.
There is one more statistic on expertise and the development of human capital I want everybody in this room to remember. Even if you remember nothing else about this address, I want you to remember that 90 per cent of the golf greenkeepers in China are trained by a Scottish college – Elmwood. Ninety per cent.
The point I am underlining of course, is that the development of human capital is Scotland’s biggest selling point.
In total, the financial services sector in Scotland employs more than 90,000 people. That number has grown by 8 per cent in the last year.
Asset management is a particular strength. Some £800 billion of assets are managed from Scotland.
Scottish companies such as Aberdeen Asset Management, Martin Currie, Standard Life Investments and Baillie Gifford have a worldwide reputation. They have a strong presence in Asia, where the internationalisation of the RMB, and the increased use of wealth funds, is likely to create additional opportunities for growth.
In very recent years, companies such as State Street, Blackrock and BNY Mellon have expanded their offices in Scotland, joining traditional investors such as Barclays Wealth.
In the retail banking sector, new entrants such as Virgin Money, Tesco Bank and Sainsbury’s Bank, have established major offices in Scotland. The Green Investment Bank based its headquarters in Edinburgh last year – and that’s a good synergy. It takes advantage not just of financial expertise but of Scotland’s prominent position in renewable energy resources.
All of these positive developments have been enabled by a responsive public sector. The Scottish Government established a Financial Services Advisory Board in 2005. I attach enormous importance to that board – in fact, I chair it. The deputy chair is Ewan Brown of Scottish Financial Enterprise, the main representative body for the financial services industry. There’s a wide range of representatives from the private sector and universities.
It’s comparable to the Financial Services Development Council established here this year, and Laura Cha, who gave the welcome address, leads; and it has a similar function – ensuring that the government gets advice from industry experts. Our body has given us expert advice in recent years on a range of issues, from infrastructure to skills strategy.
Scottish Development International is our international trade and investment agency. It works closely with Scottish Financial Enterprise and the TheCityUK. It has significantly increased its presence in east Asia in recent years – and you will hear later on from Julian Taylor, its Executive Director for Asia Pacific.
And all of Scotland’s financial services expertise is supported by a growing number of technology and professional services companies, and a world- class digital infrastructure. A new internet exchange point in Scotland went live last week which is expected to reduce internet "lag" time by some 75 per cent.
Now, let’s look to the future. Scotland, of course, faces exactly the same challenges as financial centres around the world. How do we build on comparative advantage? How do we emerge stronger from the troubles of recent years? How do we enhance our position in the face of vigorous competition from Asia, Africa and Latin America, as well as Europe and North America?
For Scotland, those questions have an additional dimension – but one which should encourage us to reflect on international trends.
Next year, the people of Scotland will have the opportunity to vote to become an independent country. So I want to consider for a few minutes how independence would benefit the financial services industry.
I noted earlier that we’ve seen a huge amount of inward investment into Scotland in recent years.
With independence we could benefit this further. For example key government functions based in Scotland – such as management of public sector assets and liabilities, and the operation of an oil fund that we propose – could in themselves present new opportunities for the financial services industry.
Full access to the levers of economic growth is important. Taking a fully co-ordinated approach to the economy – developing the financial services sector further and attracting more headquarters functions into Scotland.
As part of our planning for independence, we’re considering the best financial and macroeconomic framework for the future. And in doing that we’re taking the best advice we possibly can.
I’ve established a Council of Economic Advisers. Its membership includes two Nobel Laureates – Professor Joseph Stiglitz and Professor James Mirrlees, the Distinguished Professor-at-Large at the Chinese University of Hong Kong.
Professors Mirrlees and Stiglitz also sit on the Council’s Fiscal Commission Working Group, which in February published a macroeconomic framework for an independent Scotland.
I want to reflect on some of the international developments noted in the report that James Mirrlees and Joe Stiglitz produced – a fiscal commission working group report, which was published earlier this year on that macroeconomic framework for an independent Scotland.
The financial crisis showed that many countries, including the United Kingdom, had allowed to develop deeply flawed models of financial regulation. But it also demonstrated above all that regulation can only be effective if it takes into account the international nature of financial institutions. That’s why we have seen, in the last few years, a huge emphasis on international collaboration.
The Financial Stability Board has been established; Basel III has set capital adequacy rules for banks around the world; Eurozone members are moving towards a European Banking Union.
But even for countries outside the Eurozone, banking, asset management, private pensions and insurance are now all subject to harmonised EU legislation. The UK Financial Services Authority estimated that around 70 per cent of its policymaking effort was driven by EU initiatives.
Just dwell on that for a minute. London is the dominant financial centre in Europe. Obviously the UK is not in the Eurozone but even in that context, of the dominating financial centre outwith the central currency, the Financial Services Authority pointed out that 70 per cent – almost three quarters of the regulatory policy provisions in the UK were actually driven by harmonised EU initiatives.
Membership of the European Union will be central to Scotland’s success as a financial centre and as an economy. So we will adopt those EU initiatives, just as the UK does at present. The only implication for the rest of Europe, or for multinational companies, is that the directives will be implemented by 29 countries instead of 28.
An independent Scotland, under our proposals, would retain Sterling – working especially closely with the rest of the United Kingdom as our partner in a common Sterling area.
The Fiscal Commission Working Group set out what that would mean.
It recommended that the Bank of England Financial Policy Committee would continue to set macro-prudential policy and identify systemic risks across the whole of the sterling area. There could be a shared sterling area prudential regulatory authority for deposit takers, insurance companies and also for investment companies. And a new Scottish regulator could assume the responsibilities of the UK Financial Conduct Authority.
In other words, we propose consistency with regulation across the United Kingdom. For example, the UK Banking Reform Bill, which comes into force next year, will include measures to separate the riskier elements of banks from retail-based functions. Under the Fiscal Group’s working proposals, the measures could be enforced on a consistent basis across the sterling area.
The Scottish Government supports the banking reform measures – they begin, in our estimation, to provide a framework in which banks can be efficient and competitive, without being too important to be allowed to fail. Consistent enforcement is clearly in the best interests of banks and customers in Scotland and the rest of the United Kingdom.
There’s a simple but important point about this trend towards international collaboration – one which applies to financial centres around the world.
Financial markets and financial services companies require trust, above all. Increasingly, financial institutions will only command that trust – in the eyes of shareholders, of customers, of the public – if they accept these common international standards of regulation and transparency. And so financial centres will benefit by adopting such standards.
Effective regulation is no longer a barrier to competitiveness; it’s a boost to competitiveness.
Companies will want cost-effective locations, but they will place an even higher premium on access to a skilled workforce, and proximity to major markets. They will also value consistent and effective regulatory standards.
That puts Scotland in a strong position. We’re perfectly placed for near-shoring. We share a time zone, a language and a regulatory system with London, and our operating costs for key functions can be some 30 per cent lower than the City of London.
Those are among the reasons why companies such as Morgan Stanley and JP Morgan already have major support functions – for their global operations, not their UK operations – their global operations, based in Scotland.
But in addition, as I’ve outlined, we are an important financial centre in our own right – especially in areas such as asset management and insurance. We have a huge skills base, a good infrastructure, a supportive public sector and a great quality of life.
Those strengths are Scotland’s most important selling point. Cost is important, and Scotland is competitive on cost. But we believe fundamentally that high skills beat low wages; a strong reputation can’t come from weak regulation. Financial centres worldwide must engage in a march to the top, not a race to the bottom.
Ladies and Gentlemen, it’s 150 years now since Thomas Sutherland took that ferry from Hong Kong to Shantou, and ended up founding the Hong Kong and Shanghai Bank.
There are currently three Thomas Sutherland scholars taking undergraduate degrees at Aberdeen University in financial or business disciplines. The scholarships are just a small illustration of how Scotland is using some of the best traditions of its past to create the business and finance leaders of the future.
What the Scottish Government is working to do on a larger scale is to build on these established strengths – the reputation of our workforce to our specialism in asset management – giving us huge opportunities in the modern financial services industry. By building on them, we will ensure that Scotland – which has been so important to the past and present of financial services – will also be a major force for the future.