By Huw Jones and Belinda Goldsmith
LONDON Feb 26 An independent Scotland's use of
the British pound without the permission of the rest of the UK
could endanger the stability of the nation's financial sector,
Scotland's financial services industry head warned on Wednesday.
Owen Kelly, chief executive of the Scottish Financial
Enterprise, said adopting sterling informally would mean losing
the services of the Bank of England as a backstop and having to
shoulder the cost of setting up a new Scottish regulator.
He said using sterling outside its jurisdiction would create
uncertainty for the large financial sector in Scotland, home to
a quarter of the UK's life insurance and pensions industry.
"It would be hard to imagine the industry as it currently
exists and it would have to reconfigure to that new economic
environment," Kelly told the British parliament's Scottish
Affairs Select Committee.
"It's an open question whether you could continue to serve
UK customers from another jurisdiction."
His comments come as a currency row has inflamed the debate
over Scottish independence in recent weeks.
Scottish leader Alex Salmond wants to keep the British
currency in a monetary union with the rest of the UK and retain
the Bank of England as lender of last resort, running monetary
policy and setting interest rates.
But the main parties in Westminster have joined forces to
flatly reject this as an option.
Refusing to give an alternative plan, Salmond has insisted
that Scotland would continue to use the pound, accusing the UK
parties of bluff and saying a currency union was clearly in the
interests of both countries which are key trading partners.
His critics have branded any unilateral use of sterling as
the "Panama Plan", alluding to Panama's adoption of the dollar
without U.S. involvement.
Kelly said using the pound unilaterally, or
"sterlingisation", could prompt ratings agencies to downgrade
Scottish debt as the country would not be in charge of its own
monetary policy and would need huge reserves of sterling.
Senior financial policy officials also told lawmakers how an
independent Scotland would need to carefully organize its
financial sector if Scots voted on Sept. 18 to end a 307-year
tie with England.
Andrew Bailey, deputy governor of the Bank of England and
head of its regulatory arm, the Prudential Regulation Authority
(PRA), cast doubt on a Scottish proposal to share a prudential
regulator with the rest of the UK if both countries had
"It is not a system I observe operating in any other part of
the world that has a major financial system. It would require
very careful thought about how the single regulator would go
about managing that," Bailey told the committee.
He also voiced concerns over the difficulty of a currency
union, saying this would need strong institutional support.
Mark Neale, chief executive of the UK Financial Services
Compensation Scheme, responsible for ensuring deposit holders'
money is safe, said under EU law an independent Scotland would
need its own scheme to protect depositors at Scottish-based
He said the Scottish government would have to be ready to
step in with funds if the Scottish financial sector could not
shore up a collapsed Scottish bank.