Unravelling the Royal Bank of Scotland

That intrepid BBC journalist, Robert Peston, has been at it again, with the apparently shock news that the Royal Bank of Scotland and Lloyds may be forced to moved their registered offices and HQs to England if Scotland becomes independent, full report here. This will happen as the result of an EU Council Directive. All of which comes as a bit of a surprise, not least the revelation that this Directive dates from way back to 1995. Doesn’t exactly inspire one with much confidence in these two banks if they are only now aware of an EU Directive from 1995.  What else have they missed? Sticking to the letter of the law does not seem to have been one of the strong points of either bank. Leaving that aside, the real issue is, does it matter where the registered offices and HQ of these banks are located?

In the case of the Royal Bank of Scotland, or RBS, as it prefers to be called, much is made of the alleged fact that RBS is a “Scottish” bank. There is the added complication that there are in fact two companies called RBS. The first is the original RBS, the chain of retail branches which can be found all over Scotland. While this RBS does have some branches in England, it is predominantly a Scottish company, with its HQ in Edinburgh. The other company is known as RBS Group and though it also is registered and HQd in Edinburgh it is not a Scottish bank. A glance at their website will confirm this as it describes itself variously as a global banking and financial company or a UK centred banking and financial company. Which is not surprising as RBS Group is essentially a holding company. The real work is undertaken by the various companies which though all part of RBS Group, operate under their own name, with their own registered office and their own HQ.  As far as I can make out only two of these companies are based in Scotland, the old RBS retail bank and Adam & Co, a private banking and wealth management company. All the other companies are based and operate elsewhere.

This includes the USA, where there appear to be at least two RBS Group companies. One is Citizens Financial Group, which is based in Rhode Island. The other is RBS Securities which is based in Connecticut. RBS Securities is part of the Marketing and International Banking division of RBS Group. The other parts of this division operate from London and Singapore. All three are part of NatWest Bank. Which is not surprising, as by far the largest part of RBS Group is made up of NatWest Bank and its various subsidiaries. NatWest is of course one of the largest English banks and is as such registered in London. As are NatWest’s three private banking and wealth management companies – Coutts & Co, Child & Co, and Drummonds. Clearly there is a lot of private money around in London. It is interesting to note that to bank with Coutts & Co, for example, you need to have at least £1,000,000 available to invest, and this must exclude property. But I digress. NatWest has a few more subsidiaries, including Ulster Bank and Isle of Man Bank. The Ulster Bank is quite interesting on its own as it is made up of Ulster Banking Group, with HQ in Dublin, Ulster Bank Ireland, with HQ also in Dublin and plain old Ulster Bank, with HQ in Belfast. So much for the problems of running banks in different legal and taxation jurisdictions, not to mention different currencies.

The point of all this unravelling is that the key question is, how much of the business generated by all these RBS Group companies results in benefits to Scotland? Very little I would suspect. Only two, and two pretty small parts of the RBS Group empire operate in Scotland. With all the others, the employment, wages, spending and resulting taxes go to the countries in which they operate, whether that is England, Ireland or the USA. As RBS does not make any profits at the moment and is not likely to do so for a long time, we need not worry about where these profits would be taxed. Again I suspect very little would go to a Scottish Exchequer. Which leaves the employment and legal services that go with the Group HQ. While any loss of employment is to be regretted, I am sure the legal profession in Edinburgh will find ways of surviving this little loss. Especially as with independence there will be far greater demands for legal services, not least from an expanded government.

While there is no doubt some prestige and kudos to be gained from having the HQs of international companies in your country, it is not in practical terms that important. We can see this when we compare banking with two other stalwarts of the Scottish economy, North Sea oil extraction and whisky production. In both cases, most of the work is carried out by international companies whose HQs are located far away from Scotland. Shell and BP are two of the biggest companies operating in the North Sea. While BP is registered and HQd in London, Shell is a bit of an oddity. The parent company is known as Royal Dutch Shell and though its HQ is in the Netherlands, it is registered in London. Both companies operate in over 70 countries around the globe, apparently able to overcome all the uncertainties this must bring with all these different legal and taxation jurisdictions, all these different currencies, not to mention the political instability of many of these countries. Yet somehow the possibility of Scottish independence has them quaking in their boots.

It is similar with whisky, where many of our most famous distilleries are owned by international companies. These include Diageo, which is based in London and Campari, which is based in Italy. The key point in both whisky and oil production is that the revenues from whisky exports and oil production do come to Scotland and will remain with us in the event of independence. Some of the profits may end up in England or Italy, but virtually all of the employment comes to Scotland. Pretty much the reverse of what happens with our two overlarge banking groups. They are most welcome to leave Scotland and transfer their registration to England. As Robert Peston also pointed out, such a move would make a currency union all the more feasible and likely. Unless of course we decided that this would make rUK too dependent on a fragile and too big financial sector, and a currency union with rUK would be too risky for us.


Filed under Scotland, UK

3 responses to “Unravelling the Royal Bank of Scotland

  1. Another excellent article! One question that I’ve asked a few people on Twitter and Facebook, but without getting any useful answers so far seems to be quite appropriate here:

    Is it possible under EU rules for a retail bank to have branches in another EU country, or will it need a local HQ there to deal with financial regulations and such things?

    To be more concrete, will an English bank with Scottish branches and customers need to create a Scottish HQ to deal with those customers, or can the Scottish branches be managed directly from the rUK?

    If the former, then the fact that RBS, BoS and Standard Life might need to move some operations to the rUK will be cancelled out by Santander, the Coop Bank and many more financial institutions having to create Scottish HQs. If so, employment in the financial sector in Scotland won’t change dramatically (or it might even increase).

    Do you have any insights into this?

    • I’ve thought about this issue and have as yet found no answer. The existence of two Ulster Banks, one in the Republic and one in Northern Ireland would suggest that a bank needs its own subsidiary in order to operate in another country. On the other hand I came across this link http://www.eba.europa.eu/regulation-and-policy/passporting-and-supervision-of-branches – to something called Passporting and supervision of branches from EBA website. A bit too legalese for me to really understand it though. I might write to one of our MEPs to see if they can shed some light on this.

      • Hmmm, it looks like it may legal to operate across borders without local HQs, but as you say, it doesn’t look like many banks are doing so. It would be useful to find somebody who can clear this up.

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