A wall in Princes Street Gardens in Edinburgh, Scotland, as the Scottish independence referendum campaign continues. PRESS ASSOCIATION Photo. Picture date: Tuesday September 2, 2014. See PA story REFERENDUM Main. Photo credit should read: Danny Lawson/PA Wire

The prospect of a close vote on Scottish independence sent jitters through the City of London on Tuesday, as markets reacted for the first time to what one senior banker called “the unfathomable levels of uncertainty” associated with a Yes vote.

With less than three weeks to go to a referendum that could end the 307-year-old political union at the heart of the UK, concern rose in Britain’s financial services industry and at Westminster after an opinion poll gave the No campaign a lead of just 53 to 47.

The poll perturbed some investors, who had previously viewed the chances of a vote for independence – a move that would threaten Britain’s position and influence in the world – as slim. The most pronounced reaction was in currency options markets: the cost of buying protection against swings in the pound around the date of the vote rose as companies and speculators sought to hedge their risks.

Shares in companies with significant cross-border exposure were hit, Lloyds Banking Group which owns Bank of Scotland, and RBS were down 1.4 per cent to 74.8p and 2.4 per cent to 351.5p, respectively.

Lloyds Banking Group has drawn up contingency plans that include a possible move of its registered office to London from Edinburgh if Scotland votes for independence, according to people familiar with the situation.

The lender has not made any final decisions given the uncertainties that would follow a ‘Yes’, but one of the possibilities would be to move its legal base south of the border, meaning its Bank of Scotland division would operate from Edinburgh as a foreign subsidiary.

A move would keep the bank’s registered office in the same country as its lender of last resort – the Bank of England – as well as the UK’s deposit insurance scheme. A Lloyds spokesman declined to comment on any plans for the location of its registered office, which were first reported by Reuters.

A Yes vote would trigger protracted negotiations to break up the UK. Sir Nicholas Macpherson, the senior Treasury civil servant, admitted on Tuesday he was putting together a team of officials to deal with the potential fallout of a Yes vote, which he described as “contingency plans about contingency plans”.

Bookmakers still think there is only around a 20 per cent chance of Scotland breaking away from the UK but opinion polls have tightened since a televised debate in which Alex Salmond, Scotland’s first minister, was generally seen to have outmatched the leader of the No campaign.

Senior members of Prime Minister David Cameron’s Conservative party were particularly alarmed at the polling indications that supporters from its junior coalition partner, the Liberal Democrats, and from the opposition Labour party were switching to the Yes camp.

Ed Miliband, Labour leader, will visit Scotland on Thursday in a bid to persuade his party’s supporters to stick with the union; other Labour figures including Gordon Brown, former prime minister, are also expected to make a final appeal for support.

Front Sterling chart

The YouGov survey for the Sun newspaper, which put the pro-union lead at just 6 percentage points once undecided voters were excluded, led to investors starting to buy protection against a sharp fall in sterling in the event of a Yes vote.

Despite the intensity of the political campaign, in recent months investors have taken heart from the relatively unchanged polls, but on Tuesday some started to factor in the risk of a Yes vote.

A shock vote for independence would present investors with “unfathomable levels of uncertainty,” warned Bill O’Neill, the head of UBS Wealth Management’s UK investment office, who said some Scottish clients were already moving cash to English registered banks as a precaution.

“The sheer shock and the clear expansion in the distribution of outcomes would lead to something . . . dramatic, at least in terms of initial reaction,” he said.

“The market’s ability to price would be extremely difficult, in terms of applying an appropriate risk premium. But suffice to say we would be launched into a period of very significant constitutional uncertainty.”

Investors expect a surge in volatility and a sharp fall in both sterling and gilt prices if polls start to put the Yes campaign in the lead.


Letter in response to this report:

The good, the bad and the ugly outcomes for Scotland / From Mr Matthew Baker

Get alerts on UK politics & policy when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article