SCOTS FINANCE: A BRAND IN BITS? Scotland's financial services

0 Comments | Sunday Herald, The, Sep 28, 2008

Ben Thomson, Chairman of Noble Group and member of the Financial Services Advisory Board (FiSAB)

While sadness and frustration were expressed at the special meeting of the industrygovernment-union Financial Services Advisory Group (FiSAB) last week, it was really a meeting about how to preserve and create good-quality jobs in the financial services community: how could we ensure that whatever happens with HBOS, many quality jobs remain in Scotland; and, secondly, if the HBOSLloyds TSB merger goes ahead, there are bits of that empire that it would be great to have in Scotland which would give us more quality jobs.

If you look at comparable situations, for example when Aegon took over Scottish Equitable in 1994, there was a real concern then that the change of ownership would lead to a lack of quality jobs. And yet Aegon employs more high-grade people to look after Aegon's UK business than it did when it was Scottish Equitable. Likewise, Prudential employs more people than Scottish Amicable did, and Norwich Union employs more people than General Accident in Scotland. It's about getting people of the right quality and making sure that hearts and minds are kept in Scotland.

There are four things that it would be great to retain in Scotland if HBOS and Lloyds come together. The fi rst, obviously, is that it would create one of the largest life insurance companies in the UK with the combination of Clerical Medical and Scottish Widows. It would be great if that piece of the business was headquartered up here.

The second is the risk management part of the business with SWIP and other fund management operations.

The next would be corporate banking.

HBOS had great strength in small and medium-sized corporate lending. With all that experience we believe Scotland would be a great place from which to run the largest corporate lending book in the whole of the UK.

Finally, wealth management and private banking are part of what both Lloyds and HBOS do. It would be really quite positive if that was based here.

What leverage do we have over Lloyds TSB? Only that they will want this deal to go through as smoothly as possible, and they will want as many friends as possible. We also have the leverage of actually working with them to make sure things happen. Secondly, their plans are fairly nascent still. There is leverage in being able to point out and argue convincingly why Scotland does make such a good place to locate, and unless you can argue that it makes sound sense then it won't happen. It's up to us to do that.

How did HBOS allow this to happen?

I don't think anyone really knows the full story. I don't think this is a knockon from a bank having done anything stupid, but clearly HBOS was one of the most exposed to the UK property market and Halifax is the largest mortgage lender in the country, and HBOS had a specialisation in the property sector, particularly in corporate lending. They took a decision and got on with it.

Professor Michael Moss, business historian and archivist, Glasgow University

I'm afraid we should prepare for a massacre on the Scottish high street. TSB had an extensive branch network in Scotland that was rationalised when the bank merged with Lloyds in 1995 with a few concessions to Scottish sentiment. Lloyds will presumably want to keep their own network up here as the ICT infrastructure is in place.

Despite their vague protestations, it is highly unlikely Lloyds would want to move its HQ to Edinburgh.

The Mound will presumably continue as a token of Bank of Scotland heritage, while Lloyds TSB's current HQ at Henry Duncan House in George Street will close its doors.

Of far more concern, however, is what all this all means for "Scotland the brand" in financial markets.

Scotland - and the north of England for that matter - has traditionally had a strong reputation for providence.

All that seems now to have changed. Both HBOS and RBS appear to have pursued aggressive strategies to acquire market share. In one case, this has lead to a takeover and in the other to prolonged uncertainty.

From a historian's point of view, it is hard to see how Scotland can quickly recover its reputation and position in financial services in what is inevitably a declining market for fi nancial services.

I am less concerned about the lack of competition in the financial services sector as a result of the HBOS merger. If indeed HBOS was buying market share, then its attractive products based on an unstable business model would have been withdrawn as the banking sector contracted and was restructured. That is what happens in any financial crisis.

For the depositor there will continue to be competitive products from financial houses (now including the investment banks) seeking retail funds that are much cheaper than the wholesale money market. This in itself may distort retail banking.

It is clear from spending time in the US that the worst is by no means over and they are further ahead than us. Our house prices still have a long way to fall until they revert to the mean. Houses are, after all, a form of equity investment, albeit lumpy. Over the piece equities tend to do better. Given their lumpiness and size in most household portfolios, it will take several years for the price fall to work through and translate into renewed confi dence.