Legal Briefing

Scottish independence: an update

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Public Sector | 01 February 2014

The debate on Scottish independence has been running since early 2012, but took several significant steps forward towards the end of 2013.

The Scottish Independence Referendum Act 2013 was passed by the Scottish parliament on 13 November and received royal assent on 17 December. It sets out the procedures for the conduct of the referendum, and confirms that on 18 September 2014 voters will be asked the question, ‘Should Scotland be an independent country?’. The question of who will get to vote was settled earlier in the year, when the Scottish Independence Referendum (Franchise) Act 2013 set the franchise as those entitled to vote in local government and Scottish parliament elections (which includes EU citizens), plus 16 and 17 year olds. 


Now the necessary legislation is in place, we can focus entirely on matters of substance. These crystallised somewhat on 26 November, when the Scottish Government published its ‘Guide to an Independent Scotland’ (previously trailed as a ‘White Paper’ on independence). The 670-page guide contains myriad proposals on the structures and institutions that would have to be established following a ‘yes’ vote (what we might call ‘structural’ issues), as well as a number of policy proposals the Scottish National Party (SNP) would implement if it were successful in the May 2016 election to the newly independent Scottish parliament (which, on the Scottish Government’s proposals, would be preceded by ‘independence day’ on 24 March 2016). While there is a difference between the two categories, there are some areas in which the guide (perhaps unavoidably) is not always entirely clear on where the line is. However, it does aim to explain what a ‘yes’ vote next September, followed by an SNP victory in the subsequent election, would mean for Scotland.

This article deals with some of the key proposals falling into the ‘structural’ category. There are of course many of those to choose from, but the following may be of most interest to in-house advisers.

THE EU

The Scottish Government is set on remaining within the EU, but despite that (or perhaps because of it) the question of EU membership has been one of the hottest topics since the independence debate began in earnest.

The Scottish Government previously argued that Scotland would be automatically entitled to EU membership on the same terms as those currently enjoyed by the UK (including opt-outs from the euro and the border control free Schengen area). However, the guide reflects the more realistic line adopted recently, recognising the need for negotiations and the agreement of all 28 existing member states on the fact and terms of Scottish membership.

The legal process by which that might happen is unclear; the guide notes (in its only use of Latin!) that ‘the Scottish situation is sui generis’, there being no specific provision in the EU Treaties for part of an existing member state becoming independent but seeking to maintain EU membership. Accordingly, its resolution must be left to the murky world of political diplomacy.

The Scottish Government proposes to negotiate membership on the UK’s existing terms, describing this approach as based on ‘the principle of continuity of effect’. However, that is not in fact a legal principle – rather, it seems to be a shorthand description for the Scottish Government’s preferred outcome.

That would no doubt be an attractive proposition for Scotland, and several of the guide’s proposals depend on it – eg Scotland remaining part of the common travel area, which allows for a lack of border controls within the British Isles, is contingent on obtaining an opt-out from the usually standard obligation to join the Schengen area. However, such a deal may be less attractive for other member states opposed to Treaty opt-outs in principle (particularly in relation to the euro), or who may be tempted to make things difficult for Scotland in order to discourage their own nationalist movements – the Spanish Prime Minister has recently stated his view that if part of a member state becomes independent, it must leave the EU and apply to join from outside.

It is probably unlikely that another member state would veto Scottish membership outright, but there would have to be a risk that the favourable terms sought by the Scottish Government could not be secured. Another critical area of risk would be the Scottish Government’s target of concluding negotiations and implementing the terms within its proposed transition period of 18 months between a ‘yes’ vote in September 2014 and independence in March 2016. It describes that approach as ‘negotiating from within’ – ie negotiating while Scotland is still within the UK, with a view to becoming a distinct member state immediately upon independence. While that timetable would not be impossible, it would set a record (and by some margin) for achieving EU membership.

The 2016 Scottish parliament elections would give the Scottish Government a significant incentive to secure agreement on that schedule, but other member states may not feel the same sense of urgency. The timetable might therefore risk putting the Scottish Government in the difficult position of choosing between a delay to independence, less-than-ideal membership terms, or exit from the EU (perhaps with some temporary quasi-membership status) while negotiations were concluded.

CURRENCY

The Scottish Government’s preferred currency arrangement is to retain sterling in a formal currency union with the rest of the UK (‘rUK’), which would see the Bank of England continue to act as lender of last resort in Scotland and take account of the Scottish economy when taking decisions on interest rates, money supply and the like.

However, this would require the agreement of the UK government following a ‘yes’ vote. The UK government has stated that it will not ‘pre-negotiate’ on issues such as currency before the referendum, but its equally consistent message (echoed by Labour) has been that it would be unlikely to agree to a currency union.

The ‘sterling zone’ is nevertheless the only option countenanced in the guide, stated as if it were a certain outcome of a ‘yes’ vote rather than something that would have to be agreed. The Scottish Government’s basis for resisting calls to set out a ‘Plan B’ is an argument that currency union would be in rUK’s interests as well as Scotland’s, due to the level of cross-border business and Scotland’s contributions to the sterling balance of trade, as well as a claim that Scotland might refuse to accept a share of UK liabilities if rUK did not agree to a currency union. It can only be a matter for speculation, while that remains a hypothetical scenario, how the markets would view such a move.

Notwithstanding these arguments (and without even mentioning the euro, and whether Scotland could either secure an opt-out or mimic Sweden’s – perfectly lawful – failure to give effect to its own treaty obligation to join the common currency), the prospect of an independent Scotland adopting a new currency cannot be ruled out.

One of the biggest consequences of this would be for ‘pre-independence’ contracts. When countries change currency, obligations are usually redenominated into the new currency because the old currency has ceased to exist (eg when France adopted the euro, franc-denominated contracts automatically redenominated into euro at the official conversion rate). However, sterling would continue to exist even if an independent Scotland adopted another currency – an essentially unprecedented scenario.

Redenomination could therefore introduce an exchange risk into existing contracts, which would fluctuate as Scotland’s new currency moved in value against sterling. Whether particular contracts would redenominate could depend on complex but long-established legal principles, applied on a case-by-case basis. There are nevertheless things that can be done now to manage the potential consequences of a currency change, in particular revisiting existing contracts and drafting new contracts to make them more likely to remain sterling denominated (or vice versa, if preferable).

REGULATION

The guide’s financial regulation proposals are inseparable from its currency proposal, and so would also require agreement with rUK. The guide acknowledges that an independent regulator would be required (by EU law, it implies), but then proposes that financial stability would continue to be the responsibility of the Bank of England’s Financial Policy Committee, with a remit covering the ‘sterling zone’. Prudential regulation would be conducted by either a single shared authority or the regulatory arm of a Scottish Monetary Institute working closely with an rUK counterpart.

On conduct regulation, by contrast, the guide proposes a separate Scottish regulator to assume the key responsibilities of the Financial Conduct Authority, though working on a ‘closely harmonised’ basis with rUK regulators.

The guide envisages that sectoral regulation (in energy, post, telecoms and media, and some elements of transport) would be joined with the existing devolved water regulator in a ‘combined economic regulator’. It is sparse on the details of that regulatory model, referring back to a Scottish Government paper (‘Economic and Competition Regulation in an Independent Scotland’) published in February 2013. That suggested that a single Scottish regulator would replace not only the various UK regulators (OFGEM, OFCOM etc), but also the competition functions of the OFT and Competition Commission (themselves to be combined in the Competition and Markets Authority as of April 2014).

However, a later paper (‘Consumer Protection and Representation in an Independent Scotland’) proposed instead a separate body combining competition regulation with consumer protection. The guide appears to favour this latter idea, though without expressly acknowledging the inconsistency between the two. Greater clarity would therefore be welcome on what exactly the Scottish Government has in mind for competition regulation in the event of independence.

THE CONSTITUTION AND THE COURTS

The guide sets out a constitutional framework that would enable the creation of an independent Scotland, expanding on positions already adopted by the Scottish Government over the preceding months.

It envisages the new state being based initially on a minimal ‘constitutional platform’ containing the constitutional and administrative arrangements essential to establishing an independent Scotland. The UK and Scottish parliaments would then agree a transfer of power to enable Holyrood to formally enact independence for Scotland, and make changes during the transitional period – including a significant change in relation to the courts.

The guide proposes the creation of a new Supreme Court for Scotland, though in truth this would simply be the removal of the UK Supreme Court’s Scottish jurisdiction so that the courts below – the Inner House of the Court of Session and the High Court of Justiciary – would regain their pre-Union roles as Scotland’s highest civil and criminal courts respectively. This would not even require a change of stationery, as those courts never stopped styling themselves as ‘the Supreme Courts of Scotland’ (Scotland has of course always had its own court system, its retention being a condition of the 1707 union with England).

Previous Supreme Court and House of Lords decisions in Scottish cases would still be binding in Scots law, at least until superseded by later decisions of the new highest court(s). However, Supreme Court decisions in English cases (technically not binding in Scotland but generally treated as if they were) might lose some of their persuasiveness. That may be particularly so for post-independence decisions, in which Scottish judges would of course no longer be involved.

The guide also envisages the establishment after independence of a constitutional convention tasked with preparing a written constitution. Much is said about such a constitution reflecting the ‘sovereignty of the people’, but there is little detail on how the power of the Scottish parliament might be limited (other than a reference to ‘entrenching’ the European Convention on Human Rights). The court reform proposals are nevertheless some recognition of the need for a superior court (whatever form it takes) to uphold the rule of law – something obviously critical to all citizens, businesses and other parties wishing to protect rights and property in a new state.

While the guide produced some insight into the Scottish Government’s ‘vision’ for an independent Scotland, a number of key questions remain unanswered. Indeed, there are some issues on which clarity may be impossible in advance of the vote. The official referendum campaign is scheduled to begin in June 2014, allowing a final 16 weeks before Scotland’s constitutional future is decided.

By Charles Livingstone, associate, Brodies LLP.

E-mail: charles.livingstone@brodies.com.