UK: Scotland: Legal Issues On Proposed Independence

On 18 September 2014, the referendum on Scottish independence will take place. Opinion polls suggest that the outcome is too close to call. This note highlights various legal issues related to the referendum and Scottish independence, in particular those related to the location and status of financial institutions, membership of the European Union, possible structures for a new currency and the national debt. Issues connected with credit default derivatives are addressed in a separate client note.

The Referendum

The referendum is governed by the Scottish Independence Referendum Act 2013. This legislation was passed by the UK Parliament, following an agreement between the UK and Scottish Governments in October 2012 that a referendum on Scottish independence could take place. The Act sets out the key provisions governing the referendum, including the question – "Should Scotland be an independent country?" The Act also prescribes the procedures and processes for the referendum. If the result of the vote is "no," then no further steps would take place. If the result is "yes," then further legislation would be required to cede Scotland as an independent country. In the meantime, again, nothing would happen immediately following the vote. The process of cessation would require further legislation by the UK Parliament. All of the UK's three main political parties have committed to respect the outcome of the referendum, but oppose independence. This may mean that the details of any cessation will take a long time to agree and longer to become effective. Many of the key details of independence, such as a currency, are unknown. In the following sections, various possible ramifications of independence are discussed, but the ultimate outcome on any matter is subject to uncertainties.

UK Constitutional Arrangements and Nomenclature

The British Isles, in the geographical sense, includes two independent countries: the United Kingdom (comprising England, Wales, Scotland and Northern Ireland) and the Republic of Ireland. The Channel Islands (Guernsey, Jersey, Alderney, Sark and others) and Isle of Man are crown dependencies or possessions. None of these smaller islands are part of the United Kingdom, though they enjoy various beneficial treatments in terms of trade and immigration law. If Scotland becomes independent, then England, Wales and Northern Ireland would comprise the "rest of the UK" or "rUK." The London-based rUK parliament would no longer have Scottish MPs. Based on past election results, this is likely to mean more regular Conservative governments in Westminster; and Labour or SNP in Scotland. There are uncertainties as to how maritime territory would be separated, an issue relevant to the status of some North Sea oil fields and related pipelines.

Membership of the European Union and other European Free Trade Associations

Scotland's future status as part of, or outside the EU (or other European institutions), is relevant to the likely legal and financial sector impacts of independence for various businesses. The rUK would presumably accede to the UK's membership and, as a new country, Scotland would need to apply for new membership of international bodies. Because the structure for separation of Scotland from the rUK is unclear, it is similarly unclear as to whether Scotland could be automatically co-opted into the EU or otherwise fast-track an application for membership. Because the relevant treaties do not cover this situation and there is no obvious precedent, it is difficult to predict how such a process would be handled. Other EU countries with separatist movements (e.g. Spain) might not want to simplify the process of accession and could even exercise their veto rights to prevent this. As has been experienced by Eastern European countries, the formal process for becoming a member of the EU is complex and can be lengthy. Membership is subject to the unanimous approval of the Council of the European Union on the basis of an opinion issued by the Commission and approved by the EU Parliament. Criteria for membership include having "(i) stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; (ii) a functioning market economy and the capacity to cope with competition and market forces in the EU; and (iii) the ability to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union." 1 It is frequent today for a referendum to be part of the application process, but Parliamentary approval would be sufficient and might be considered appropriate for a territory that has historically been part of an EU member state. There are various other European countries currently being considered for EU membership. Scotland would need to implement EU laws and regulations. Depending on timing, it might be possible to do this by ensuring that up to a particular date, UK parliamentary legislation applies. Certain infrastructure requirements, which Scotland currently meets as part of the UK, would need to be addressed in advance of any accession. An alternative or interim option would be to adopt the Norwegian model of joining the European Free Trade Association ("EFTA") and obtaining access to EU internal market through the European Economic Area ("EEA"). This involves compliance with and implementation of all the directives and regulations adopted in the EU, but with only a limited ability to influence them. Once in the EEA, however, the main benefits to businesses and the financial sector of accessing European markets become available. Alternatively, Scotland could join the EFTA and conclude bilateral sectoral trade agreements without joining the EEA (as Switzerland has done). Otherwise, Scotland will be treated like a third country, such as the US, with limited access to the EU and its markets. Accession to the EFTA (which allows access to the EEA) is at the discretion of EFTA's council, which may impose terms and conditions. Generally speaking, however, EFTA looks to the implementation of laws equivalent to EU directives and regulations. As with the EU, applications can take some time, as Croatia has experienced.

Legal Jurisdictions

Scotland is already a separate legal jurisdiction with its own case law and judicial system. England & Wales and Northern Ireland are two further separate legal jurisdictions. Many Acts of Parliament apply equally to English, Scots and Northern Irish laws in policy terms, with only minor technical differences in implementation. Presumably, UK parliamentary Acts prior to independence would have to be given validity in Scotland. If Scotland becomes independent, it is possible that over time there will be an increasing divergence between its laws, legal system and administrative institutions with those of the rUK. Upon independence, Scotland's laws will be very similar to those of the rUK and its institutions will be based on UK ones. A degree of continued harmonisation is likely through EU/EFTA membership and for cultural and competitiveness reasons. Harmonisation of laws may be required if there is a currency union for pound sterling or if any administrative arrangements or government institutions are shared with the rUK. However, laws north and south of the border will doubtless diverge over time.

Impact on the Financial Sector

Two legal requirements mean that independence is likely to have a serious impact on financial companies. First, a "passport" under relevant European Directives permits access to investors throughout the European Union. A passport would be available for a business located in the UK (or rUK), but would not be available were Scotland to fall outside the EEA for any period. It is critical for the business of any financial institution doing cross-border business that such a passport is available. Secondly, under the EU's Capital Requirements Regulation, a bank must have its registered office and principal place of business in the same EU member state. The former Royal Bank of Scotland (RBS) has already announced plans to re-register its head office in London in the event of a "Yes" vote, reflecting the larger size of its London operations. Perhaps more surprisingly, most of the other main Scottish financial institutions (including the largest national banks such as Clydesdale) have announced plans to relocate their head office to the rUK in the event of a "Yes" vote. Such banks will have to treat Scotland as some form of outsourcing or operational centre and customer base, at least temporarily, in the event of a "Yes" vote. For banks and other corporates with sizeable operations in the rUK which decide to change the place of their registered office but use the same registered company for their operations, few legal issues will arise. However, corporates which need to establish a new rUK head office as a separate legal entity would have to overcome various obstacles to ensure that their counterparties continue to deal with the right legal entity. Court transfer schemes are potentially available to achieve smooth novations for banks, but not for corporates in other sectors. If Scotland joins the EU or EEA, then there would be nothing to prevent former Scottish banks and other businesses from moving back again (assuming adequate central banking facilities are established). Banks, financial institutions and others would at that point be able to use passport rights to access counterparties and customers throughout the EEA. If Scotland is outside the EU and EEA, however, then the possibility of access to European markets and customers from Scotland would be much reduced. Fund managers based in Scotland would find themselves treated like any other managers based outside the EEA, potentially limiting the ability of those managers to market funds to EEA investors. The proposed new Markets in Financial Infrastructure Regulation (MiFID II/MiFIR) provides for a helpful new regime of access to third country investment firms such as brokers, exchanges and advisors whereby an "equivalence" decision in relation to a non-EEA member state's laws, together with registration, could facilitate access to European markets. However, this involves a separate and potentially lengthy process of study and its own political elements – and there is currently no similar "equivalence"-based regime for fund managers under the Alternative Investment Fund Managers Directive (AIFMD). The access of third country institutions to the European markets is discussed in a separate client note.2


Pound sterling would remain the currency of the rUK. Scotland would be a new country and have to adopt its own currency. Possible options for a Scottish currency include:

  • Retaining the pound sterling. This may require negotiation of a Euro-like currency union with the rUK. This option is currently disclaimed by the Bank of England and the three main UK political parties.
  • Adopting the pound unilaterally (like Panama does with USD) with no influence over sterling monetary policy.
  • Joining the Euro.
  • A new currency, such as a Scottish pound, similar to the old Irish pound (punt).

The status of "lender of last resort" undertaken by the Bank of England and the availability of its liquidity facilities also requires consideration.

Unless there is a change of tack and Scotland is allowed to use pound sterling, ultimately a Scottish Central Bank will need to take on this role. This might be in conjunction with the European Central Bank if Scotland adopts the Euro. Until a detailed proposal and timetable is produced, there will likely be an unfavorable economic environment for any Scottish banks that have not relocated, particularly medium to long-term credit ratings, because the time at which the Bank of England backstop will cease (and the credit quality of what will replace it) will be unknown.

National Debt

Scotland would need a separate credit rating and the ability to raise its own debts as a sovereign. Unless a restructuring takes place with creditors, existing national debt of the UK would in principle stay with the existing debtor, the UK (or its main successor, the rUK). Any proposal for a restructuring could be damaging: replacement of the UK as a creditor with a creditor of different risk profile could reduce confidence in UK debt as a whole. As a result, as a minimum, some sort of guarantee by rUK to existing creditors for debt assumed by Scotland might be needed. Alternatively, the rUK could maintain all the existing debt, with Scotland liable to the rUK for part of it under some sort of back-to-back reimbursement arrangement. The status of debt issued after a "Yes" vote would also be interesting. It might be possible to offer different tranches that would convert into rUK or Scots debt, for example, but even in the latter case, an rUK guarantee might still be expected. An offer to take up some of the national debt is considered by the independence movement to be a "bargaining chip" in entering a currency union with the pound sterling, but the two points are not necessarily linked. The debt to GDP ratio of rUK would increase unfavorably with Scottish independence if rUK remains as a guarantor or primary obligor of national debt. However, it is not clear if the ability of the rUK to pay the debt would be adversely affected, taking into account the net tax revenue (after allowing for public expenditure) of the two proposed countries.


1 See.

2 Extraterritoriality Revisited: Access to the European Markets by Financial Institutions, Funds and Others from Outside Europe, available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Barnabas W.B. Reynolds
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions