RBS, Lloyds to Lead Financial Exodus on Scottish Yes Vote

RBS, Lloyds London Move 'Irreversible' After Scot Turmoil
An RBS logo hangs from a bridge leading to the Royal Bank of Scotland Group Plc's (RBS) campus in Edinburgh. RBS and Lloyds, which both received a government bailout in 2008, are the two biggest lenders in Scotland. Photographer: Simon Dawson/Bloomberg

Scotland’s financial-services industry is threatening to head for the border, with Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc saying they plan to move to England if the country votes for independence.

Lloyds said in a statement late yesterday that it already has a contingency plan for establishing new legal entities in England in the event of a Yes vote, while RBS said today that such an outcome would make it necessary to re-domicile the headquarters.

In the event of a Yes vote, there are “a number of material uncertainties arising” from the referendum that could impact RBS’s credit ratings as well as the “fiscal, monetary, legal and regulatory landscape to which it’s subject,” the bank said in the statement. Planning “this is the responsible and prudent thing to do and something that its customers, staff and shareholders would expect it to do.”

RBS and Lloyds, which both received a government bailout in 2008, are the two biggest lenders in Scotland. They join National Australia Bank Ltd.’s Clydesdale Bank, TSB Banking Group Plc and Standard Life Plc, Scotland’s largest insurer, which have said they’ve made contingency plans to move parts of their businesses to England if it votes Yes. The chief executive officers of BP Plc and Kingfisher Plc have also spoken out in favor of a united U.K., while the head of Aberdeen Asset Management Plc said Scotland will prosper either way.

RBS shares rose 1.2 percent to 346.4 pence at 1:15 p.m. in London. Lloyds gained 1.1 percent to 74.02 pence, while the U.K.’s FTSE 100 Index retreated 0.6 percent.

‘Irreversible’ Risk

RBS and Lloyds may decide to re-domicile even if Scotland votes against independence, bank analysts said, citing the precedent of Bank of Montreal to move to Toronto in the 1970s amid the rise of Quebec separatism, which was ultimately defeated.

Rather than risk perpetual uncertainty over Scotland’s future, “the banks would want to kick off the relocation process irrespective of the decision,” said Chirantan Barua, an analyst at Sanford C. Bernstein in London. The risk has become “irreversible,” with a move costing the banks as much as 1 billion pounds ($1.6 billion) each, he estimated.

Lloyds said in the statement it has seen an “increased level of inquiries” from customers regarding contingency plans, adding that there would be enough time to “take necessary action” should voters say Yes. The lender owns the 319-year-old Bank of Scotland and has its registered office in Edinburgh.

Contingency Plan

“Lloyds’s contingency plan to relocate to London in the event of a Yes vote is understandable,” a Treasury spokesman said in a statement. “Any company should be free to choose where to locate its base, in the light of what best suits the stability and competitiveness of its business.”

RBS and Lloyds, which is 25 percent state-owned, want the government to introduce new legislation to help speed up the process of moving their domiciles to England in the event of a Yes vote, according to two people with knowledge of the matter. The process could take as long as 18 months under current laws, said one of the people, who asked not to be identified because they aren’t authorized to speak. Sky News reported the move earlier today.

Politically Motivated

Scottish First Minister Alex Salmond, leader of the Scottish National Party, said today at a press conference the release of the news on the banks relocating was politically motivated and wouldn’t affect Scottish tax revenue, operations or jobs. Salmond said the U.K. Treasury leaking details of banks’ plans to relocate to the media should be investigated.

Deputy Prime Minister Nick Clegg said it is “almost comic” how Salmond is trying to downplay warnings from “major, major figures” about the economic consequences of independence.

“These are very serious people, raising very serious concerns,” Clegg said in an interview on LBC radio.

Officials at the pro-union Better Together didn’t reply to telephone calls and e-mails seeking comment.

One in eight people in the Scottish capital work in the finance industry. RBS, which has roots in Scotland dating back to 1727, has a 350 million-pound, 120-acre campus on the outskirts of Edinburgh with capacity for 3,250 staff.

Dual Identity

Characteristic of its dual identity, the headquarters has two automated teller machines for staff: one that dispenses Bank of England notes and one stocked with their Scottish counterparts. RBS employs about 12,000 people in the country, while Lloyds has some 16,000 staff.

“The issue could come back again in future years, so it’s entirely conceivable that in due course you’ll see the banks switching their registration to England,” even if there’s a No vote, said Ian Gordon, an analyst at Investec Ltd. in London.

RBS, 80 percent owned by the British government, and Lloyds shares have fallen since a weekend poll showed the Yes vote leading for the first time in the Sept. 18 referendum, as uncertainties were reignited about customers withdrawing deposits, Scotland’s future currency, the future regulatory environment and the lack of a central bank. A poll today put the No campaign six percentage points ahead.

Bank of England Governor Mark Carney told U.K. lawmakers yesterday assets in the Scottish-domiciled financial industry are about 10 times Scottish gross domestic product, totaling more than 1 trillion pounds. He added that a Scottish central bank without control of the sterling currency wouldn’t be a credible lender of last resort, leaving open the prospect banks based there could fail, taking depositors money with them.

Quebec Experience

“The lender of last resort for an independent Scotland for an entity headquartered in Scotland, regardless of where its assets are, is a responsibility for Scotland,” Carney said.

If the country votes No, its banks and businesses would be faced with a similar situation to Quebec where the independence movement was defeated in 1980 and 1995, according to Paul Donovan, a London-based economist at UBS AG.

Royal Bank of Canada and Bank of Montreal both moved to Toronto from Quebec’s largest city in the 1970s as the separatist Parti Quebecois gained votes and took office in 1976. Quebec has also seen 550,000 people emigrate since 1971, according to Statistics Canada. Its share of the top 500 Canadian companies fell to 75 in 2011 from 96 in 1990, the Fraser Institute, a Canadian research group, reported.

Fund Managers

“Certainly the banks relocating from Scotland is a real possibility in a Quebecois scenario” of multiple referendums, said UBS’s Donovan. “If you look at Quebec, bank deposits never recovered -- if people wanted a bank account they didn’t even consider opening one there, they’d open it over the border instead.”

Scotland’s fund-management industry is also making preparations to relocate due to a lack of clarity about regulations, what currency the new country would use and whether the country will join the European Union, Bloomberg Intelligence analyst Charles Graham said in a report Sept. 10.

“Standard Life has a long history in Scotland -- a heritage of which we are very proud and we hope that this continues,” CEO David Nish said in a statement yesterday. “But our responsibility is to protect the interests of our customers, our shareholders, our people and other stakeholders in our business.”

To be sure, RBS said today it intends to keep a “significant level” of its operations and employees in Scotland. Martin Gilbert, CEO of Aberdeen, Europe’s biggest publicly traded money manager, said an independent Scotland would be a “big success,” the BBC reported today.

Divided Nation

“What I am more worried about is the damage we are doing in the event of either Yes or No vote,” Gilbert said on BBC Radio 5. “Either way, it’s going to leave a very divided nation in Scotland and possibly in the event of a Yes vote a divided United Kingdom.”

Sanford C. Bernstein’s estimate of 1 billion pounds of costs to RBS and Lloyds includes a limited amount for physical relocation, as well as renegotiating derivative contracts and changing the jurisdiction of debt products, Barua said.

“These banks are already run from London so there won’t be a massive cost to relocate thousands of people,” he said. “The costs will come from moving their contracts -- everything they’ve signed is incorporated in Edinburgh, which will end up with banks paying huge checks to accountants, consultants and lawyers doing the transfer work.”

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