Election 2010: Interview - Stewart Hosie MP, the SNP

According to the Scottish National Party's spokesman on finance and Treasury matters, Stewart Hosie, an independent Scotland could quite happily compete with Ireland in attracting financial services business to redomicile there.

The MP for Dundee East comments: "The key to Scotland's future success is the fiscal levers. Ireland's success can be in some way attributed to its low corporation tax. We've done a lot of businesses a huge favour in Scotland via the 'small business bonus' with 100 000 companies paying no business rates. And we are about to reset the business rates from 1 April, which will see a £220m tax cut in Scotland.

"So, the direction we are taking is clear. We could bring down corporation tax rates in Scotland because we remain convinced that, by lowering the rate over time, Scotland would encourage existing businesses to stay and others to relocate here. This would result in a net increase of corporation tax yield.

"The issue is about the fiscal levers and that is where the debate about Scottish independence is right now. This isn't an emotive issue, it's a political one."

Capacity to compete

For Mr Hosie and his colleagues, the sight of several insurance companies relocating to Dublin from Lloyd's, for example, Beazley; from Switzerland in the case of Zurich; and even from Bermuda as Willis has done, raises the question of how prepared Scotland could be for a similar influx.

"Scotland could compete with any country around the world in the sectors we are good at. We already have firms with a global reach in a range of sectors and that includes financial services. What we need to do to compete on the international stage is have even more global companies, in more sectors, headquartered in Scotland. And that should be possible due to the skills base in law, in accountancy and in finance, among others."

Asked whether he believes too much emphasis is placed on London and EC3 as the financial services and insurance centre of the UK, with the consequence that talent migrates there from elsewhere, including Scotland, Mr Hosie responds: "Well, there is no doubt that London has a big draw and the City is a vital part of the South-east and UK economy.

"But, equally, Edinburgh and other parts of Scotland have very strong and healthy financial businesses. Some are doing very well. For example, Alliance Trust in my constituency of Dundee.

"So, while there are some extremely good companies in Scotland, I am concerned there will be a brain drain over time — and that is always a concern when you get a small country next to a big one. But our job as the SNP, in particular with the fiscal powers we want to see transferred to Scotland, would be to deliver a competitive tax regime that allows every sector to prosper."

Reflecting on the economic train wreck that has impacted every corner of the globe in the past two years and is set to be a major election issue, Mr Hosie shares some sympathy with the Conservative Party's view that the Financial Services Authority is, at least, partly culpable for what has happened in the UK and should have its powers diminished.

"The FSA's role should be on the consumer side and the regulatory function should be undertaken by a bank," states Mr Hosie. "I think we saw, even with Northern Rock, the failings in the [existing] tripartite system, which led to the inability of an early takeover. Instead, it took another five months before Northern Rock was nationalised, and then a further year after that for the emergency provision to get the Banking Bill on the stocks.

"The government has since recapitalised the banks to the tune of hundreds of billions of pounds, pumped in hundreds of billions more in terms of emergency liquidity, effectively nationalised Royal Bank of Scotland and taken on the contingent liabilities of Bradford & Bingley, Dunfermline Building Society, Northern Rock and others.

"And yet, despite committing so much money, the government has extraordinarily allowed the banks to continue to operate under the same regulatory regime that allowed them to fail in the first place. Now you can accuse the government of many things, but acting quickly is not one of them."

In Mr Hosie's eyes, the FSA's failings are in many ways symptomatic of a lack of resource — and expertise — although he is quick to stress that he is not advocating the regulator becomes even more bureaucratic. Instead he wants to see its employees better utilised in the areas that need the most attention, and says 'light touch' regulation does not necessarily mean 'soft touch' regulation.

Rock solid regulation

"Among the allegations that have been levelled at the FSA is that it simply did not the have the resources, people or skill set to understand what was going on, especially on the prudential side within the banks.

"Now if you look at the Basel II regime within banking, and now Solvency II in the insurance space, the Accord proposals mean that whoever regulates firms has to be absolutely rock solid, with staff that know everything inside out to avoid some of the same mistakes being allowed to happen again."

Mr Hosie notes that the countdown to Solvency II has highlighted the importance of having an expert resource in place: "We are in a situation where, on 29 January, the Committee of European Insurance and Occupational Pensions Supervisors issued — on a single day — 31 separate documents, appendixes and annexes.

"This stuff is incredibly complicated and, although it is supposed to be harmonised across the European Union, the concerns over Solvency II are the same with Basel II — that's to say, whether it will be implemented in each country on a different time line, using varying methodologies, so that we end up creating more uncertainty and distorting competition in the market.

"My view, in relation to Solvency II, is that insurers should take the advice banks can offer from Basel II, which is to consider the accumulative effect of all these proposals — not just each part in isolation, but the whole package — before they drive forward towards implementation in 2012. And I think it is right in terms of the three pillars that firms need to demonstrate financial resource, good governance and public disclosure."

One of the recurring themes insurers mention, when talk turns to regulation, is that the market needs to make sure it is not disproportionally penalised in relation to the financial services sector as a whole regarding the implementation of any new regulatory regime or powers.

However, Mr Hosie is quick to stress again that each sector, whether it is insurance or banking, should not be seen in isolation: "If you go back and look at AIG, it got into difficulty as a consequence of the prudential decision-making within banks. And what this proved was that an insurer — albeit the largest in the world — could get into difficulty and posed a systemic risk in its own right."

Where Mr Hosie does have sympathy with the insurance industry is with the view that if regulation becomes too overwhelming it could have an adverse impact by, for example, sounding the death knell of some products or decreasing competition by forcing firms to close. Such unintended consequences would be counterintuitive to its intention of protecting consumers: "When I said that the regulators and national governments need to consider the accumulative impact of these plans on every part of the market, that includes the smaller players who may not represent the same systemic risk.

"There are a lot of questions being asked in terms of regulation at the moment and the SNP is very clear on this — everything needs to be road-tested. It is not about having more or less, it is about having the most appropriate. The last thing you want is to over-regulate businesses and put them out of business.

"But who would have thought that Northern Rock would have created such difficulties given that it was a rather modest, regional building society. We must not underestimate the interdependency of all parts of the sector — and the systemic risk that the collapse of a rather modest company can have. History should tell us to be on our guard, not least because we do not know where the liabilities lie."

Small-scale significance

Despite this, Mr Hosie offers Scotland's thriving independent insurance broking sector some words of comfort by commenting that, as smaller firms, they should not fall under the same regulatory regime as large insurance companies.

"I have already said that I envisage a Scottish FSA to be a consumer protection body. And sole trader independent financial advisers and brokers would fit perfectly into that model. They are very important in terms of their presence on the high street, and the trust local people have in buying financial products from them. But they are not big in relation to PLCs. Let's work out what these guys are doing and not annoy some poor broker on the high street by over- regulating them."

Another subject that has surfaced in light of the recent economic turmoil is that of financial literacy and education — trying to ensure that consumers are aware of what they are, or in some cases not, buying. "I am hugely supportive of introducing financial literacy at an earlier age, so people know what their insurance policy will deliver and will know what their pension will deliver for example," Mr Hosie comments.

Educational responsibilities

"We have a miserably low savings ratio, and every time we have a flood there are scores of people who are not insured at all, or did not have contents insurance. They are left abandoned and ruined because they did not have the correct cover in place.

"Some of this is a result of the financial climate and, in a downturn, even when people are working they are scraping around for cash. But because society as a whole feels poorer there are decisions people will put off. And that is not just about replacing the three-piece suite or buying a new car, but taking out or enhancing the insurance cover they have on their house. I believe the industry has a responsibility not to be hectoring and lecturing people but to make the point that it could be a false economy not to buy insurance.

"People might see this costing a few hundred pounds a year and wonder why they should buy it. But one day, should anything happen, they will not be able to find the £50 000 to cover their possessions. It is important to get that message across."

Finally, the discussion turns to Scotland's profile as a safe pair of hands when it comes to finance. Several prominent savings and life companies remain that either bear the word 'Scotland' in their name, or are headquartered there. But does Mr Hosie believe that the country's previous reputation as being 'good with money' has taken a hit with the high profile collapse of one of its most famous brands — RBS?

"I would say the banking sector overall has taken a hit and this is not a Scottish issue. I am certain the Scottish brands will be able to rebuild and do it relatively quickly. The skills sets and experience here are phenomenal and there a huge number of successful institutions that are not in receipt of government cash — and are lending."

Mr Hosie on...

Recent Scottish successes "The decision by Tesco Bank to move to Glasgow — bringing a huge number of jobs with it — is a huge vote of confidence in the ability of the skills base within Scotland."

Competition "One notable thing is the lack of competition on the high street. We welcomed the government's announcement that it was going to break up some of the regional [banking] networks because, for instance, there is a virtual duopoly in Scotland between RBS and now Lloyds. So, if we can create more competition, and if the Scottish government could provide a facility that would create a Scottish investment bank, that would be fantastic."

Gold-plating "In relation to Solvency II, there are concerns the Financial Services Authority could be what is described as 'more strident' in its application than other bodies. We have to guard against that. We cannot let the financial institutions make the risky decisions they took previously. But, by the same token, we have to carry out our supervision of these institutions in a way that is proportionate, that genuinely manages the risk."

Insurers merging sites in Scotland "The consolidation of sites is something that has happened in every sector. But I am delighted that Aviva continues to maintain a major site in Perth and was very pleased by the sensitive way it transferred [insurance operations] staff to there [from Dundee] with transport put on and no compulsory redundancies. So, I am less concerned by the consolidation of sites than I am about ensuring we have competition and strength in all the financial services sectors — whether that is broking, insurance or banking. My biggest concern is that we have strength in depth and competition."