Tim Rideout has asked me to publish this guide created by the Scottish Currency Group and I am happy to do so:
1. When will the Scottish Pound come into use?
As soon as possible after Independence Day, which means as soon as the Scottish Reserve Bank, the central bank of Scotland, is ready and Parliament authorises it to proceed. The aim is that this should be of the order of a few months, but that depends on how long there is between a vote for Independence and Independence Day.
2. How long does it take to create the Scottish Reserve Bank and be ready to release the new currency?
The Scottish Currency Group plan shows this to be about 4 years, of which 18 months or so of preparations can be done now before IndyRef 2.
3. Why is it called the Scottish Pound?
This seems to be the most popular choice, but there are other options from Scottish history such as the Merk, Noble and Lyon.
4. Will I be forced to convert my money?
No, everyone is free to choose how much of their savings they wish to exchange into the S£. If you prefer to keep your savings in Sterling you are free to do so.
5. Do I need to do anything?
Yes, as the default position is that your bank accounts, cards, etc will all stay exactly as they are. Your bank will contact you some months in advance and ask you if you would like to have an account(s) in the new currency. You will need to instruct them to set up the account(s) if that is what you want.
6. Will my new S£ account and cards be the same as my existing ones?
No. Your existing Sterling account has a UK sort code, contains Sterling and is ultimately under the control of the Bank of England. That can't be changed so you will need a completely new account with a new Scottish sort code that can contain the S£ and which is ultimately under the control of the Scottish Reserve Bank.
7. Can I keep my Sterling account(s) and have new S£ accounts?
Yes of course. If you travel to rUK or place orders with rUK shops often then it would be quite sensible to keep your existing Sterling account and debit card. That will save you foreign exchange fees in the future.
8. Isn't this even more complicated than Decimalisation in 1971 or bringing in the Euro?
No, it is actually much easier for us and businesses. That is because £1 will equal S£1, so there is no need for any shop or restaurant to change any prices, get menus reprinted, buy new cash registers, etc. All you will notice are a new design for the bank notes and coins, and a new debit card for making payments.
9. Can I just carry on using Sterling for all my purchases?
Yes, but after the initial Exchange Period this will start to cost you foreign exchange fees that will be the same as when you use Sterling in Spain or other foreign countries. The Exchange Period is the first month or two when the Scottish Reserve Bank will keep the two currencies fixed at one to one and with no charges for changing between them. After that the S£ will start to float on the currency market and the banks will charge a foreign currency fee on Sterling transactions. Shops may decide to stop accepting Sterling bank notes and coins.
10. Isn't this all very difficult for businesses that buy or sell in rUK?
Not really. We will do what happens in Canada. Most businesses will probably keep their Sterling accounts, credit card machines and the like and use those when buying or selling in rUK. They will use their new Scottish accounts and credit card machines for their dealings within Scotland.
11. What about my mortgage, credit card and personal loan?
All loans will stay exactly as they are in Sterling until you instruct your bank to change them. There will be no automatic conversion into S£. Your bank will contact you near the time and ask if you would like to re-mortgage into the S£, or take out new S£ credit cards and loans. The banks, Scottish Government and the Scottish Reserve Bank will run an information campaign to explain to you the risks and benefits of changing loans into the S£ compared to leaving them in Sterling. It is likely that the Reserve Bank will assist / require the banks to provide the same interest rates and terms on replacement S£ mortgages and loans as you had on your old Sterling ones.
There are about 900,000 mortgages with a total outstanding debt of £75 billion, making the average mortgage £83,000. That is about 30% of Scottish households meaning that 70% of households do not have a mortgage to worry about.
12. If I re-mortgage how does this work?
You are best to ask your bank to do this during the Exchange Period, the first two months or so. That will avoid you having any currency fees to pay or any risk from exchange rate changes. After you instruct your bank to arrange an S£ mortgage you will complete the standard process of selecting a mortgage (fixed term, tracker, etc), an updated valuation if required and the legal paperwork. On the date agreed with your bank they will release the S£ funds, exchange those into Sterling and use that Sterling to repay your Sterling mortgage. Your Sterling mortgage account will be closed and you will be left with just your new S£ mortgage account. You can do this at any time, but the longer you delay the more likely that the S£ and Sterling values will diverge, in which case it might cost you either more or less in S£ to repay the Sterling loan.
13. What is the big picture on our debts?
By far the biggest component of personal debt is mortgages. Exact data for Scotland is hard to find, but personal loans, credit cards, and overdrafts probably total less than £20 billion. As there is no change to Sterling debts until such time as people and business ask for their banks to exchange them into the S£, then it is expected that the exchange of debts into S£ will lag significantly behind the exchange of deposits and cash. As we have seen with mortgages then exchanging a debt into the new currency involves paying off the old Sterling loan. This means that settling these debts requires an outflow from the S£ and into Sterling. For example, I take out a new S£500 overdraft and ask my bank to pay off my old £500 Sterling overdraft. That means my bank will sell S£500 and buy £500. That is most likely to be via the Foreign Exchange market, but may be assisted by the SRB. This will depend on whether the transaction is before or after the initial Exchange Period ends, and what the conditions are in the FX market. If there is a large or sudden outflow of S£ to redeem Sterling debts then the SRB can intervene in the market to buy up (and thus cancel) an surplus S£. It can do that using part of the Sterling reserve it acquired selling us the new S£. It should be kept in mind that there is also a long tail of people who held on to Sterling who will exchange it gradually over many months. That inflow will to a large extent mop up the outflow that is clearing old Sterling debts.
14. What about my ISA?
If you have a cash ISA then it is up to you to decide whether to keep the money in Sterling or to exchange it into the S£. There is no guarantee that the Scottish Government will continue the ISA scheme after Independence so there might be tax changes. If you keep your cash ISA in Sterling then it may become a foreign investment rather than a domestic Scottish one but it would still fall under the jurisdiction of Scottish tax law. If you want to avoid exchange rate risks you will be safer to exchange your Sterling cash ISA into S£. Until such time as there is a Stock Exchange in Scotland then a stocks and shares ISA would remain in Sterling as the shares would be held in the London market.
15. What about my wages?
This depends on your employer. If you work for the Scottish Government, Scottish Health Service, a Council or any other public sector body then from the first month your wages will be paid in S£. You will not have a choice about that. The amount you get paid will be exactly the same as before. If you work for somebody else then it is up to you and your employer to agree whether they continue to pay you in Sterling or switch to S£. Most employers are likely to switch to the S£ within a month or two, simply because using Sterling will become inconvenient.
16. What about my pension?
It is likely that as part of the Independence Negotiations the Scottish Government will agree to take over the UK State Pension for anyone resident in Scotland on Independence Day. If that happens then the new Scottish State Pension will be paid in S£ only. Any Scottish public sector pension (Council, SHS, Fire, etc) will be paid in S£ only. For the declining number of people lucky enough to have a private sector company pension then it is up to the pension scheme to decide. Where it is a Scottish company scheme then they are likely to change to pay in the S£ within a short period. Where it is an rUK scheme (e.g. British Airways), then it will continue to be paid in Sterling. Annuities, personal pensions and similar from rUK providers (e.g. Aviva) will be paid in Sterling. Scottish providers (e.g. Scottish Widows) will probably offer the option to convert to receiving S£ if you wish to do so. Some large pension schemes (e.g. the Universities USS) may choose to allow Scottish pensioners to be paid in S£ rather than Sterling. If you use an rUK pension provider you may wish to move your pension fund to a Scottish provider if you want to avoid any exchange rate risk.
17. Don't we need to save up Foreign Exchange reserves before we can introduce the S£?
No – this is a much repeated and common fallacy. The new S£ is not given out free of charge. Every new S£ is sold to us in exchange for us paying £1 Sterling. So if the Scottish Reserve Bank issues S£40 billion in the first week, it will also receive £40 billion of Sterling as payment. That becomes our Foreign Exchange reserves. You should note that the UK net reserves are US$88 billion (BoE data for August 2020), so pro-rata Scotland would need $8 billion. As there are around £160 billion that belong to us and which will be gradually exchanged then the Scottish Reserve Bank will end up with very large reserves. If we allow the Scottish Banks to carry on issuing their own design of bank notes then the £4.5 billion they hold on deposit at the Bank of England would also move to the SRB, while the SRB will get the £3 billion Bank of England notes and coins that currently circulate in Scotland when they are replaced by the new SRB ones.
18. What happens to the Banks?
Commercial banks and building societies that wish to continue to do business in Scotland will need a Scottish subsidiary company that is registered in Scotland and obtains a banking licence from the Scottish Reserve Bank. It is standard practice that foreign banks, which would after Independence include rUK banks such as NatWest, would not be allowed to offer services in Scotland if they do not comply with the requirements of the Scottish Reserve Bank.
Sterling can't be held in a bank in Scotland and S£ can't be held in a bank in rUK other than as cash notes and coins. That is because holding the currency in an account requires that the account and the bank are connected to the relevant central bank payment system and account ledgers. So for a bank such as Tesco Bank it will divide into Tesco Bank (rUK) Plc and Tesco Bank (Scotland) Plc, with both companies being owned by Tesco Banking Group Plc. Prior to Independence our sterling accounts (and loans, etc) will become part of the rUK part of the relevant bank. In the case of Tesco Bank (rUK) Plc it would carry on being a Bank of England regulated bank that works in Sterling. Tesco Bank (Scotland) Plc would initially have no accounts or funds and thus a zero balance sheet. When the currency is created the new S£ accounts will be opened in the relevant Scottish bank company. If you ask to exchange £500 into the S£, then the rUK bank holding your Sterling account will sell that £500 to the Scottish Reserve Bank. The SRB will deposit S£500 to the Scottish Bank company Reserve Account at the SRB (of the same banking group, e.g. Tesco Bank) for onward deposit to your new S£ bank account.
The SRB works in S£ so the Sterling it buys from us can't be held in the SRB accounting ledger. The way banks work this is to hold the foreign currency in a correspondent bank that works in that currency. It is likely the SRB would use the Bank of England, but it could use Barclays or another Sterling bank. In the above example the £500 would be paid into the SRB correspondent bank.
19. I have been told the banks will have unmatched assets and liabilities and that this will cause a big problem?
No they won't. It is a bit complicated as it is all double entry accounting but here goes. The first thing to note is that every bank has a Reserve Account at its central bank. The reserve account is where the bank keeps its money. So just as my company has an account at Santander, so the Bank of Scotland has an account at the Bank of England. If I ask Santander to pay a supplier who banks at Barclays £500 then £500 is debited to my Santander account and it is also debited from the Santander reserve account. The Bank of England credit the £500 to the Barclays reserve account for onward credit to my supplier.
When I ask for £1000 from my Santander account to be exchanged into S£ this is what happens. Santander (rUK) debits my account by £1000 and credits the Scottish Reserve Bank sterling correspondent bank £1000. Lets say that is the Bank of England for simplicity. So £1000 is debited from the Santander Reserve Account and credited to the SRB Reserve Account. Deposits in a bank are a liability of the bank, so Santander (rUK) has a fall in liabilities of £1000. The Reserve Account is the bank's own money and thus an asset. That has also fallen by £1000. Thus Santander (rUK) has seen the assets and liabilities fall by the same £1000 and all that has happened is the balance sheet has fallen by £1000. The exact opposite happens at Santander (Scotland) as the customer deposits increase by S£1000, and the assets in the Reserve Account increase by S£1000, so both match and the balance sheet has increased by S£1000. There is no mismatch and nothing is owed between Santander (rUK) and Santander (Scotland).
20. It has been claimed that the commercial banks will face huge foreign exchange risks?
This is not true. We have already seen that the banks will have to divide into a Scottish Bank and an rUK Bank. The S£ customer deposits and new loans and mortgages in the S£ will be entirely in the Scottish Bank. The old Sterling deposits and old Sterling mortgages and loans will be entirely in the rUK Bank. As we already saw the balance sheets in the rUK banks will fall with no mismatch between assets and liabilities. The balance sheets in the Scottish banks will rise, again with no mismatch between assets and liabilities. There is nothing owed from the Scottish Bank to the rUK Bank, or vice versa. If there is nothing owed, then there is no foreign exchange risk.
What risks there are, are taken by the Scottish Reserve Bank. Those are any risks during the short fixed rate of the official Exchange Period when banks and the public are indemnified against FX movements / costs, and later as the SRB will have a large holding of foreign currency that might rise or fall in value. Equally we (individuals and companies) will have a currency risk to the extent that we retain Sterling deposits in our old bank accounts (now located in the rUK part of our bank), leave our mortgages and loans in Sterling, or remain in receipt of a pension paid in Sterling. The public information campaign will educate us about those risks and ensure we can take suitable action in good time if we wish to do so. Many people may choose to leave their arrangements as they are, perhaps keeping a Sterling loan because they also have a Sterling income (e.g. a pension or share dividends). The more adventurous might choose to speculate that the S£ could rise against Sterling, but that is not recommended for anyone without a clear understanding of the risks and a willingness to accept that could cause a loss just as easily as a gain.
For more information see www.reservebank.scot, or email info@reservebank.scot
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
What is the general feeling about a new currency in Scotland? From where I’m sitting, admittedly south of the border, it looks like even those who want independence, or say they do, don’t want to have to change currencies. One argument I’ve heard is that Scotland should follow the Irish example and keep the link to Sterling. Another is that the pound is just as much a Scottish currency as an English one so there is no reason why they can’t share it.
This isn’t going to work as far as re-joining the EU is concerned but adopting the euro doesn’t appear to be any more popular than having a floating Scottish pound. Incidentally, I’m not at all sure about making a supposedly “firm commitment” to the EU about adopting the euro and then simply ignoring it, Swedish style, will wash with either the Scottish people or the EU. The Scots won’t like that approach and the EU will have learned from previous mistakes.
Jim
The answer is easy. If there is no Scottish currency there quite simply is no Scottish independence.
I remain baffled that this cannot be worked out.
And as for the EU, they cannot apply differing rules – and continue to use this mechanism now so the suggestion I and others have made is entirely reasonable
Richard
In the section relating to pensions, it says “Annuities, personal pensions and similar from rUK providers (e.g. Aviva) will be paid in Sterling. Scottish providers (e.g. Scottish Widows) will probably offer the option to convert to receiving S£ if you wish to do so.”
I’m retired and a large part of my income comes from an annuity with Aviva.
As a committed supporter of Scottish Independence and one who recognises that without its own independent currency Scotland would be independent in name only, I’m prepared to accept the exchange risk to part of my income as a price worth paying for the greater good.
However, although I don’t know how many people in Scotland have annuities personal pensions and similar from rUK providers, every vote will count and I suspect that many of them are “don’t knows” on Scottish Independence who would be pushed firmly into the No camp if they thought that the predictability of their income for the rest of their lives would threatened in this way.
Pension and annuity providers based in rUK would presumably not want to miss out on business from residents of an Independent Scotland and would therefore want to set up Scottish subsidiaries trading in S£. Could they not be encouraged / persuaded during the transition period between Independence Day and Currency Day to offer their Scottish based pensioners and annuitants the choice of transferring to those subsidiaries or would the pension and annuity contracts prevent that?
I think that would be entirely possible
I was spending time in Germany at the time of unification and the best decision that Helmult Kohl took was parity of the two currencies. Much wailing and gnashing of teeth, but politically necessary. The decision to NEVER force individuals or institutions to choose between the two currencies is to me a vital part of the programme.
Thanks, Tim.
I see you address the Asset/Liability issues of banks…. which is great.
I need to look at what you say in detail which is not easy bouncing around on a boat. But I will as I think it is important that this is watertight.
I think Tim would like your comments
Thanks Richard, a very useful summary. I was living in NL when Guilder changed to Euro, was a seamless, trouble-free process. Will be even simpler for S£, as it will have parity with UK£ initially. For me £Scot is a no-brainer after Indy.
I hesitate to comment because I have not yet read it with sufficient care, but on a first quick look I see little on taxation, which will loom large in the decisions people are required to take.
Link to what I wrote yesterday
Perhaps I should not have commented, but confess I do not understand. I read the piece as an everyday users ‘guide’ to the currency. Questions 5, 6 and 7 stress that the default position is that you need do little (presumably even if you retain everything in sterling). I was simply looking for the guide’s references to taxes being paid in S£ and the guidance to sterling users. Perhaps I am missing something, but I did not see any direct reference to this in what you wrote on the 13th?
OK – the point you make is that the bleeding obvious is not stated and that is an issue I did not notice and nor I guess did Tim
It’s always good to have such commissions pointed out
Tim, might you look at that?
OK, as of Currency Day then all official payments and receipts will be in S£ only. So what that means is that ScotGov will require all tax to be paid in S£ and any other payment such as speeding tickets etc. Also ScotGov (and all related bodies such as the SHS, Councils, Police, Fire, and the like) will pay wages and suppliers in S£ (unless the supplier is located outwith Scotland, but not wages for anyone outwith Scotland).
The value of the currency is enforced by the state requiring it be used. So it is voluntary to exchange your savings but I had someone on twitter stating they were going to keep ‘everything in sterling’. In which case they will pay an FX charge to convert their income out of the S£ into Sterling and they will pay another FX charge to convert their day to day spending money out of sterling and back into the S£. Not clever I think.
This is all very softly softly wrapped up in a velvet glove, but as with all states there is ultimately a requirement to decide if you are part of that community or not.
Agreed
Thank you. I read this document as a trial or draft of a ‘user guide’; and it immediately struck me that – in Richard’s choice language of the “bleeding obvious” – Questions 4, 5, 6, 7 (for example) had magically turned the “velvet glove” into an invisibility cloak. Being “free” not to switch from sterling does not come “free”.
Why would anyone change their S£ into sterling then back again? That’s stupid. What they would do is keep their savings in sterling and then perhaps convert any surplus income to sterling. If the S£ falls in value, as it will, that would be good investment.
Real people do not think that way
I’m real, and that is what I would do.
A good example of what I think will happen is Uruguay (always sensible to benchmark plans). There, anyone sensible keeps any money they can in dollar accounts which are easily available. Though the peso is relatively stable (look at blue dollar rates in neighbouring Argentina), people are justifiably wise to hold dollars rather than pesos.
So, as a current Scottish resident, I would as an insurance policy head towards Berwick to open a sterling account.
.
There would be nothing to stop you
I very much doubt most in Uruguay do this
I applaud the work done by Tim Rideout and team. With due respect to them I would hope that Wales/Cymru does not consider this Scottish initiative as a mere template for our journey to our own currency (or currencies, as I would prefer). It would be lazy to do so.
It is likely that when we study this issue in depth we will come to differing conclusions. Local factors will come into play which will indicate other options. Nonetheless, we should understand the structure of their approach and plug in where appropriate.
Why should you be very different?
You will also need your own currency
Well written piece and clear to people with some knowledge of the finance industry. I’ve read all your stuff and watched the videos but, forgive me, I’ve one broader question that’s been nagging me for months.
Many commentators say that commercial banks have an unlimited capacity to create money through lending. The recipients of loans will eventually spend them with other banks and thus the lending bank’s reserves at BoE will decline and eventually run out hence imposing a limit. Am I missing something? Please put me out of my torment!
In principle a bank so reckless as to do this might end up in that situation
But regulators would see it coming and step in now – the lesson of Northern Rock has been learned – and action would be taken
Banks are not actually free to make money
Thanks for clearing that up. We need to debunk this myth as well
They are constrained in several ways. Firstly there is regulation. We have a senior banker in the SCG who is actually in charge of complying with the regulations and he/she did a presentation to the SCG Working Group on Banking recently. So it seems the post 2008 rules (which come mostly from Basle and not the UK) can mean a bank needs up to 25% reserves. Compared to 5% if you were lucky before 2008. So that significantly limits activity. While a bank can create any amount of new money by lending, what the bank needs to worry about is how much of that new loan leaves the bank. If Santander grant a £100m loan to a company who immediately use that to buy a factory owned by somebody who banks at Barclays, then the Santander Reserve Account (which is Santander’s own money as opposed to deposits belonging to clients) will fall by £100m while the Barclays one rises by £100m. If the Reserve Account gets too low then not only would the bank be in trouble with the BoE but they would be at risk of going bust. So it should also be fairly obvious that the bigger the bank the less likely it is that new money created by a loan will leave that bank. This is why starting a challenger bank is very difficult. It is also why something like a Credit Union has limited ability to increase the money supply while Barclays has a considerable capability to do so. If you allowed a monopoly of only one commercial bank it would in effect have much the same ability as a central bank to create new money without limit as it would be safe in the knowledge that none of that new money was ever going to leave its accounting ledger. In the case of the BoE, for example, there is only one sterling central bank so none of the base money (M0), created by QE or a state deficit can ever leave the BoE accounting system (other than a little bit as bank notes) as it just goes around Reserve Accounts and Treasury Accounts.
Thanks Tim
Quote: “Your bank will contact you near the time and ask if you would like to re-mortgage into the S£,”
Why would they do this? What is the benefit of doing this for them?
Regulators will give them no choice
What powers does the regulator have to force any mortgage company to swap currencies?
They issue their banking licence
Richard. Sorry to be a pain, and I realise that the ambiguity arises largely from the structure of my question on pensions and annuities, but does your reply to that question mean that they could transfer pensions / annuities to their Scottish subsidiaries or that the terms of the contracts might prevent them from doings so?
I am saying a £ annuity could be converted to a S£ annuity, or funds be transferred to underpin one
Very clear to understand for the ordinary person with ordinary income and expenditure. Thanks.
Has someone also done a risk analysis for the extraordinary users – such as foreign exchange sharks, who in times of change and uncertainty, circle the unsuspecting looking for a kill.
Surely in respect of State Pension rights accrued up to Independence Day there is a legal obligation on the part of the UK Government to continue payment of existing pensions to those individuals who choose not to change over from a UK pension to a Scottish State Pension albeit that their permanent residence for tax purposes remained Scotland?
This would allay the fears of some undecided citizens/voters who fear that they would be personally worse off in an independent Scotland. It would also benefit the foundling state to the extent that its overall pension liability would be reduced while its tax base remained unaltered.
I think there is
There is to a person in any other country in the world, although the increases are limited
In International Law as the Continuing State then the UK would be liable to pay State Pension rights as of Independence Day. However in this instance I feel it would be fair and reasonable for ScotGov to agree to take over the State Pension and convert it into what I call the Scottish Universal Pension. This is because there is no fund and if ScotGov is going to be collecting the National Insurance (or maybe a replacement) then it can perfectly well afford to pay the pensions. The UK would remain liable for civil service, military etc pensions (other than those of ScotGov, the SHS, etc). In the case of the so called National Debt then we have zero liability for it and there is no moral or other case for Scotland to take on any of it. If anyone was arguing about it then I would say taking over the State Pension would be our quid pro quo for them keeping the National Debt. Also note it is already SNP policy to increase the pension to S£300 / week as soon as possible after Indy.
Back from the boat…. and a question.
Tim says (para 11) that home owners can “remortgage” in SCP (Scottish Pounds). On what terms? If I have a 5 year GBP mortgage at a fixed rate of (say) 3%, will this become a 5 year fixed rate SCP mortgage at 3% or some other rate? If another rate, who gets to decide this rate? I guess, I am asking is this a genuine “re-mortgage” or a redenomination of an existing mortgage?
If it is the case that Scots can only close trades in GBP at market prices and reopen trades at SCP market prices then I accept that the banking system has little risk but I am not sure this is what Tim intends.
Tim?