Financial services make up a significant component of Scotland’s economy, accounting for around 8% of employment – similar to the rate for the UK as a whole, writes Sarah Hall.
The importance of financial services in Scotland was most clearly acknowledged by the UK Government when the Chancellor, Jeremy Hunt, launched the ‘Edinburgh reforms’ in the Scottish capital in December 2022. The Treasury’s goal is that these plans deliver the ‘benefits of Brexit’ by better tailoring regulation to the specifics of UK financial services through a smarter and home-grown regulatory framework.
The Edinburgh reforms include changes set in train through the Financial Services and Markets Bill(FSM) now passing through parliament. For example, the Bill includes plans for UK regulatory authorities to focus more on competitiveness and growth. The reforms also include some new plans such as reforming the division between smaller banks and their investment banking activities. The Treasury also commits to publishing an updated Green Finance Strategy in 2023 and launching new consultations on how to foster innovation in digital finance.
One of the most notable parts of the reforms is where they were announced and their very title. This is a clear acknowledgement of the importance of financial services outside as well as within London. For example, 37% of the 1.08 million jobs in financial services at the start of 2022 were in London, but there are significant clusters in Edinburgh, Bristol and Manchester.
The Edinburgh experience
However, most attention regarding the impacts of Brexit on the sector has been on London or has been aggregated to the UK level. Financial services employment is a good case in point, and one that shows that there are commonalities and differences in the experiences of Edinburgh when compared to both London and the UK as a whole.
At a UK level, employment figures point to greater resilience in the financial services sector than was estimated, certainly by worst-case scenarios, immediately following the Brexit referendum result in 2016. For example, recent figures suggest that the number of financial services job relocations from the UK to the EU post-Brexit is around 7000.
However, at the same time UK employment in financial services, according to the Office for National Statistics (ONS,) has flatlined since the referendum. This comes despite the fact that as of June 2022, as many as 1.06 million people were employed in the sector.
This paradox, whereby fewer jobs have relocated to Europe whilst at the same time fewer jobs have been created, has been labelled as ‘missing’ financial jobs. Crucially, in examining how we might account for these missing jobs, it is clear that the trend is not uniform across the UK. Employment has declined more markedly in Scotland than in the rest of the UK.
Employment in financial services from the ONS for the UK as a whole is shown below:
This shows three periods of financial services employment. In the first, from 2002 up until the 2007 financial crisis, employment was buoyant. The second period from that crisis until the end of the most intensive phase of the Covid-19 pandemic in 2021 is one of flat growth. The third period is more speculative, but there are signs of an increase in the number of jobs from 2021 onwards.
Figure 2 shows that the picture is rather different in Scotland, where employment has declined more markedly from 108,000 jobs in financial services and insurance in September 2002 to ‘just’ 82,431 in September 2022:
In part, this trend reflects national level changes where a degree of relocation out of the UK has taken place to address the loss of automatic single-market access following the end of so-called passporting relationships.
However, through research at UK in a Changing Europe, we have found that parts of the UK that are more reliant on retail finance, such as Scotland, particularly where there are lower levels of head office activity, have seen more exposed to jobs losses as part of wider branch closure programmes.
Cost matters
In Scotland, our research also pointed to the different personal tax regimes in Scotland as well as additional costs to businesses located in both England and Scotland, potentially making it more attractive for firms to concentrate their operations in either Scotland or the rest of the UK. As one of our interviewees set out:
There are other factors that would potentially have an impact of in Scotland. The tax decisions of the Scottish government have made it harder for firms to have big presences up there because then they’re juggling different tax rates for their employees. And obviously, if you go down the route of Scottish independence, then that’s a much bigger game changer, I think.”
insurance trade manager
Finally, whilst locations outside of London were seen as offering lower labour costs pre-Brexit, European EU member states such as Poland, Latvia, and Portugal have been identified in wider post-Brexit corporate reviews as important locations where labour costs are attractive – and provide single market membership. As one of the financiers we interviewed summarised:
One really interesting, really interesting area to look at is Poland, rather than the frontline financial centres. I mentioned that a lot of people in the City are thinking of Brexit as the occasion to rethink the UK framework, rather than necessarily the cause. For example, take UBS. It now has 5000 staff in Poland, and its headcount in Poland has increased 40% since the referendum.”
It is too early to assess the impacts of this logic of mid-and back-office cost-cutting via labour relocation, but it could be an important reason why our data points to a notable decrease in financial services employment in Scotland. This aspect has been comparatively overlooked, given the economic and political focus of much of the Brexit debate on the City of London.
These trends raise important questions concerning the place of financial services within economic growth strategies in the UK, particularly for Scottish cities that have a distinctive financial services footprint which in turn will shape their post-Brexit experiences.
Sarah Hall is Professor of Economic Geography, University of Nottingham and Deputy Director and Senior Fellow at UK in a Changing Europe (UKICE).
First published by the Royal Society of Edinburgh as part of its Scotland-Europe Initiative
Image of the former Bank of Scotland hq via © Ad Meskens / Wikimedia Commons
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