(BACS, Faster Payments, CHAPS) all of which use different message formats and are Sterling-based as they are for the UK domestic market. However
based on the Payments Strategy for UK Payments, these different systems
will be consolidated into a single New Payments Architecture by 2021. A
newly independent Scotland would need to set-up a domestic payments
infrastructure for the new Scottish currency because the BACS system with which most people are familiar is only for transactions in Sterling. However the starting point for this infrastructure would depend on the date of
independence and how much of the UK New Payments Architecture was in
place. In addition to a domestic payments infrastructure, the new Scottish currency would need to be set-up on international payment systems (such
as SWIFT) so that any payment identified as belonging to a ‘Scottish Bank Account’ (based on the country code of the account which will be discussed shortly) from anywhere in the world would be directed to the correct Scottish bank account.
So how should we deal with this? The simplest solution would be to
build a single Scottish payment system based on the ISO 20022 payment
message standard for all Scottish payments (which is the international
standard which the new UK payment system will use). The ISO 20022
message standard is used in the Euro zone in the Single European Payment 44
a practical guide for Scotland
Area (SEPA), by Singapore and is being introduced by countries such as the USA, Switzerland, Australia, New Zealand and Canada over the next few
years. As such a diverse set of countries will be using the same payment message standards this will simplify the movement of money from one
country to another and reduce time, complexity and cost. The eventual aim is to be able to send a payment between say Frankfurt and New York instantly (instead of taking two days as it does at the moment). The shift to this new payment system will mean that all UK Financial Services operations will
be running projects to modify their IT infrastructure to use the ISO 20022
international payments standard over the next five years. This will not be as big a task for them as it sounds as any of them that send Euro payments will already have software that supports these standards (accounting software such as SAGE can also produce payments in the ISO 20022 format).
Given that the work to produce a world standard payment system is
already being done the only Scottish aspect to this is the Scottish Clearing system that sits in the middle. It is worth explaining this. If £10 is transferred from an account with one bank into an account held by another bank the
account holder will enter the sort code and bank account number of the
account the money is being paid into. The bank from which the money is
being sent identifies the sort code entered as the sort code of another bank and so passes the payment to a clearing system. The clearing system then identifies the sort code as being of a specific bank and so sends the payment to the data centre of that bank. That bank receives the payment message, identifies which of its accounts this money should go into and credits the account with the £10.
A number of decisions would need to be made regarding this in a
Scottish context. Firstly, would we need a centralised clearing system (like Faster Payments today) or would we attempt to use a new system such as
‘Distributed Ledger’ where each clearing bank talks directly to other clearing banks, cutting out the need for a central intermediary. However, this is entirely untested and has been rejected by a number of countries which
have explored it, meaning Scotland should almost certainly adopt a more
traditional method – a centralised clearing system. We need to decide if this is something that is owned by a commercial company or something that is
run as part of government-supported infrastructure.
While there is some debate about how much a ‘New Payments
Architecture’ would save, it is estimated that the “New Payments
Architecture” will save between £0.8 and £1.5 billion in settlement costs for the UK – but any saving would be smaller in Scotland and there are
other clear benefits in the Scottish system from having a government-owned Centralised Payment System. This would make the movement of money in
Scotland more transparent and make easier things such as identifying tax avoidance, reducing fraud and tackling money laundering. If there was a
45
decision to set-up a centralised Scottish Payments system then there would need to be a capital investment before the cost reduction benefits began to accrue. As an indication of this cost, setting up a new centralised Scottish Payments system would be of an order of magnitude of £10-30 million
depending on the amount of functionality involved (for example whether
or not to implement anti-money laundering detection or a payment fraud
detection system as part of a centralised payment system). This is assuming that the existing ISO 20022 model was followed and there was not an
attempt to create a bespoke payment system just for Scotland (which would be more expensive).
It would be for the currency team in the National Commission to
propose a specific solution to issues such as the payment technology used in Scotland. But it should be set out as an early principle that Scotland wishes to prioritise transparency, anti-corruption and fair payment of taxes. This makes a centralised clearing model particularly attractive.
There are a few more steps banks will then need to take to prepare
for the transition to a new currency before physical money is introduced.
They must ensure the smooth transition of standing orders. Standing orders are set-up and controlled by the account holder of the bank account being debited. They are a request to transfer a certain amount of money to a
particular account at a regular interval. Consequently if the bank account were re-denominated from Sterling to the new Scottish Currency then the
standing orders attached to the bank account would also be re-denominated to the new Scottish Currency. During the transition period any standing
order from a re-denominated account paying to a Sterling account would be treated as a payment in an equivalent currency and the full amount credited to the Sterling account without any foreign currency transaction costs.
As with payments, treating Standing Orders between Scottish Pound
and Sterling accounts as being equivalent currencies during the transition period would allow time for the financial services industry to convert bank accounts to the new Scottish currency. As with payments, after any point at which the Scottish Pound is allowed to float freely (and would then not be equivalent to a Pound Sterling) would be treated as a cross currency
payment and so could attract foreign exchange commission from the bank.
Direct debits differ from standing orders in that the direct debit
represents a mandate to debit money from a bank account – standing
orders are an instruction to send money from your account, a direct debit is permission to someone else to take money from your account. This can
be a regular amount (for example to pay off a loan) or could be a variable amount (for example based on mobile phone usage, or electricity usage).
At the time of the independence vote generally direct debits coming out of Scottish bank accounts would be taken out in Sterling. Let’s use the example of a fixed price electricity tariff of £50 a month. There would be two options 46
a practical guide for Scotland
with direct debits. The first is that the company holding the mandate (in this example the electricity provider) may choose to offer to re-denominate the direct debit from Sterling to the new Scottish currency. This would probably involve the business setting up a bank account in the new Scottish currency.
The customer could then switch the currency of the direct debit at the time they re-denominated their bank account. The second option would be for
the customer choosing to switch electricity supplier (using a utility provider switching website) to set up a payment plan in the new Scottish Currency for those companies that do not offer payment in the new Scottish Currency.
Those people without access to the internet should be offered assistance to ease the switch of utility provider. Setting the new Scottish currency to be an equivalent currency to Sterling during the transition period would allow this process to take place at any point through the transition period.
Cash ISAs are savings accounts which have no tax levied on the interest
earned from the savings. They could be converted to the new Scottish
Currency using the same arrangements as other types of bank accounts.
If the ISA Account was converted to a Scottish Pound savings account then it can be assumed that the UK government would probably no longer
recognise it as a UK Cash ISA account and any tax arrangements associated would be based on the decisions of the Scottish Government. Securities ISAs are investments in funds, gilts, equities or corporate bonds. They are often sold as funds with the fund manager making the investment in the actual
underlying assets.
Irrespective of the Scottish currency introduction, the currency of
the underlying equities and bonds would stay the same as they would
become holdings in stock listed on a Stock Exchange (unless of course the underlying assets were re-denominated). These could continue to be held
as units of a Sterling invested fund (in the same way that UK citizens can hold investments denominated in US Dollars, Euros or Japanese Yen); so
there is no necessity to re-denominate these. However, the holder would
have to accept the exchange risk against Sterling if they wished to sell them and receive the proceeds in the Scottish currency if and when a Scottish currency was allowed to float freely.
Under the current ISA regulations of the UK Government, an ISA holder
that moves abroad (i.e. ceases to be resident in the UK) can continue to hold any existing ISA accounts. Therefore any resident of Scotland who owned an ISA at the time of independence and who chose to keep it, could do so and would continue to enjoy the tax free arrangements associated with the ISA product. So there is no necessity to re-denominate ISAs and depending on the new Scottish Government’s attitude to tax- free investments it may make more financial sense to leave them denominated in Sterling.
There may be different treatments for mortgages based on the time
of final repayment of the mortgage. For example for a mortgage where the 47
final repayment is made during the transition period, the lender repaying the mortgage may choose to pay it off in Sterling; whereas for a mortgage that will be paid off after the transition period, the lender repaying the mortgage may choose to convert the mortgage into the Pound Scots or continue to
keep the mortgage in Sterling. For a conversion during the transition period the re-denomination rules of equivalence would apply. As with other types of bank account it will be possible to convert from a mortgage provider that is not offering Scottish currency mortgages to one that is.
However, there may be lenders who are locked into a longer term
agreement (for example fixed interest rate mortgages) or mortgages with
early redemption fees where it will cost the lender to convert the mortgage to tPound Scots or the bank will refuse to allow conversion to take place (for example if they feel the Scottish Currency will depreciate against Sterling once the currencies are separated). In these scenarios the lender could either be hit with fees through no fault of their own or they could be prevented from converting their mortgage to Pound Scots (and so potentially paying a foreign currency transaction fee with every mortgage repayment if the
Scottish Pound is floated). Consequently, there would be a case (on the basis of fairness) for the Scottish Government either to mandate that all mortgages on Scottish property can be converted to the new Scottish currency or for the Scottish Government to repay any fees incurred by Scottish residents as a result of the conversion of a Sterling mortgage to a Scottish currency mortgage.
In the 2011 census there were 2.4 million households in Scotland of
which 34 per cent lived in a dwelling with a mortgage. This gives 816,000
mortgages in Scotland at the time of the census. The fees and charges attached to each of these mortgages will vary but if we take use of an indicative fee to redeem a mortgage early of £1,000 then this cost is potentially a substantial figure of £816 million.
This is of course a very high figure, but it is at the top-end of potential estimates for government help in the re-denomination of mortgages. In
reality, if someone redeems their mortgage early to change the currency
of the mortgage, then the likelihood is that they will need to replace it with another one in Pound Scots. So they will look to find the best deal from the other mortgage providers in the market. In this scenario a mortgage
provider risks losing all of their Scottish loan book as a result of their refusal to offer mortgages in the new Scottish Currency. Consequently, the likelihood is that most mortgage providers will seek to retain their business by offering to convert the currency of their Scottish mortgages to the new Scottish currency to keep their customers.
At this stage all the necessary banking arrangements would be in place
to enable people to hold bank accounts, make payments, transfer mortgages and so on. The next stage is to introduce the physical money, the notes and 48
a practical guide for Scotland
coins. It is worth just stating at this stage that the world is not yet ready for a ‘cashless society’ in which absolutely every payment from buying a pint of milk upwards would be done digitally. Many people remain attached to
cash and see it as a reliable fall-back which will always exist. Nor should we underestimate the sentimental, emotional and sometimes nationalistic
attachment to physical money as a national symbol – both Eurosceptic
campaigners and anti-independence campaigners have used ‘Keep the
Pound’ campaigns which they believe to resonate with a lot of voters. For the time being at least, it is not the moment to move to a cashless society with only digital payments. This means Scotland will need notes and coins for its new currency.
One additional point which it is worth making is that it is hard to
underestimate how significant the physical representation of a currency can be for people. There are numerous occasions – from the secession of the
Baltic states from the Soviet Union to the creation of the Euro – where the images and design of a new currency became important and sometimes
contentious issues. It may not seem a particularly important matter
to many of you but in fact getting the imagery and symbolism of a new
national currency right may be an important step in gaining the confidence and support of the citizens who are going to use it. A strong suggestion is therefore that there should be a national competition to design the notes and coins. This should be a strong, participatory process.
Perhaps first people should be asked to think about the brief for a new
note – asking questions like should it feel old and traditional or modern and fresh, dwell on traditional cultural signifiers or create new ones, have identifiable people and places on them (and if so, which ones) or stick to representations of more general things (perhaps flowers or native animals) or entirely abstract ones. This could help to create a general brief for the design competition. This should of course be open to everyone with leading artists encouraged to enter. But it should also be open to schools, children’s groups, art therapy groups and anyone else who wants to participate. Presumably
there would be a jury to select a shortlist of designs which might then be publicly consulted on. All of this process should be designed first to create banknotes and coins with which everyone is happy and of which everyone
is proud, but also to create a genuine public ‘buy-in’ to the new currency, which is best able to make them feel that this is something of which they have personal ownership.
The introduction of a physical currency is time consuming. When the
Euro was set-up there was a three-year period between the point that the electronic Euro currency came into existence and the physical notes and
coins were introduced. Similarly the decision by the Bank of England to
introduce a new £5 polymer note was made in December 2013 but the
actual note was not introduced until September 2016, just as the new £1
49
coin was announced in the 2014 budget and entered circulation in March
2017. So an estimate can be made that the introduction of a physical Scottish Currency would take about three years.
One of the reasons for the length of time it takes to introduce a physical currency is the need to change vending machines and ATMs. There will also be a cost associated with the recalibration of vending machines and ATMs for the new notes and coins; for example the Automatic Vending Association have said the cost of introducing the new 5p and 10p coins in 2011 was
£28.9 million and the cost of introducing the new £1 coin is estimated at £32
million to ensure that the estimated 500,000 vending machines in the UK
can accept the new coin. It should be noted that replacing a whole currency allows vending machines to be upgraded for all notes and coins at the same time so this cost is not magnified by the number of new notes and coins
being introduced. Therefore it can be expected that this cost for Scotland would be of the order of £5 - £10 million and could be reduced as many
newer vending machines can be re-programmed to accept a new coin (or
set of coins) rather than need to have their mechanism physically changed.
In the same way that establishing an equivalence between Sterling and
the new Scottish currency will simplify the introduction of the new currency; so maintaining the same value for the coins and notes that will make up the physical currency will simplify its introduction (for example a £1 coin will be replaced by a 1.00 ‘Scots’ coin). This will mean that shops will not need to change their tills as 1.23 ‘Scots’ will be held in the same compartments as
£1.23. Consequently the simplest introduction of a Scottish Currency would be a decimal Scottish Pound made up of 100 cents. The notes and coins of this currency would be: one cent coin, two cent coin, five cent coin, 10 cent coin, 20 cent coin, 50 cent coin, one Scottish Pound coin, five Scottish Pound note,10 Scottish Pound note, 20 Scottish Pound note, 50 Scottish Pound note and 100 Scottish Pound note.
The most recent precedent for introducing a new physical currency
is Slovakia switching to the Euro in 2015, which all happened over a two-week period. If this model is taken, the physical Scottish currency should be planned to be distributed to banks, credit unions, ATMs etc. prior to the two-week period. A service offering exchange of notes and coins to businesses should then be in place for the two-week period and thereafter the physical currency used in Scotland would be the new Scottish Currency.
When a central bank issues bank notes it does so at a profit based on
the difference in the cost of production of the notes and the face value of the note. This is known as seigniorage. In its 2016 Annual Report the Bank of England give a figure of £462 million in net seigniorage income based on a value of £67,818 million of notes in circulation. At the same time the three authorised banks in Scotland (Clydesdale Bank, Bank of Scotland and RBS) had a total of £4,462 million worth of notes in circulation. Based on 50
a practical guide for Scotland
these figures the value of Scottish bank notes in circulation was roughly 6.6
per cent of the UK notes in circulation. Based on this very rough calculation the seigniorage income to a Scottish Central Bank would be around £30
million.
Studies associated with the introduction of polymer notes in Australia
put the cost of production of a polymer note at around 17 Australian cents (roughly 10 pence). The number of notes in circulation in the UK is around 3,500 million notes. Taking a percentage of this based on the value of notes issued by Scottish banks gives 228 million Scottish bank notes. So using the figure for cost of production of the Australian bank notes this would give an estimated cost of production of £23 million for a new set of Scottish bank notes. Obviously there are not the same profits to be made from the issue of lower denomination coins as there are from higher denomination notes
but from these figures, based on an investment of around £50 million for the issuance of a new physical currency by Scotland, then the Central Bank would be in profit in less than 2 years.
One point to note is that the Sterling notes and coins exchanged for
the Scottish Currency will still have a value as they will still be used in the Sterling area. Thus the physical Sterling exchanged could be used to pay for the costs associated with the new Scottish Currency or alternatively this amount could form part of the foreign currency reserve of the new Scottish Central Bank.
Setting up a central bank, either with regulatory responsibility or in
parallel with a financial regulator, and with a properly capitalised foreign currency reserve is the final part of the architecture of the currency that needs to be put in place. This will be discussed in the next chapter. But there is one aspect it is worth mentioning at this stage and that is setting up the country code to be used for Scottish bank accounts. A country
code is needed for international payments. Banks in the European Union
are identified by an IBAN (International Bank Account Number). The first two characteristics of the IBAN number identify the country of the bank
account. For example IBAN Number GB29 NWBK 000003 123456678 refers
to a UK bank account (the country code for the UK is GB), held at NatWest Bank (NWBK), with a sort code of 00-00-03 and a bank account number of
12345678. The country of the bank account is required not only to route a payment from say Germany or Japan to the national payments system but
also identify the country of the bank account for any money laundering or sanctions checking legislation.
Country codes are issued by the International Standards Organisation
(ISO) and all the obvious two character country codes that could be used for Scotland (or variations like Caledonia or Alba) are already in use. SC is the Seychelles, SO is Somalia, SD is Sudan, ST is Sao Tome and Principe, CA is Canada and AL is Albania. Therefore a decision would need to be taken 51
regarding which country code to use before Scottish bank accounts could
begin to be opened.
With this, and the central bank and regulatory functions in place, the
architecture and implementation of a new currency would be complete. But it is then important that steps are taken to ensure that a new currency is a success. There are a number of steps which the National Commission and
the Scottish Government (both at the time of transition and the early years of independence) can do to help ensure that success. Perhaps the first is that a new tax system for Scotland should be designed to be paid in the Scottish currency – and these (and legal fines) should be mandated to be paid in
Scottish Pounds as early as is physically possible – which could be as early as when a digital currency is first set up. To ensure this happens not only at a central government level but also at a local government level, a deadline should be set for all local taxes to be collected in the new Scottish currency a year prior to the final introduction of the physical Scottish Currency and the end of the transition period. It will mean investment in IT infrastructure at both a central and local government level and this will be discussed later.
However, as some people do not have bank accounts and there may be
some other special cases prior to notes and coins being available, some
flexibility in this will be necessary.
As equivalence would exist between Sterling and the new Scottish
currency then the fact that many Scottish people were paying taxes from
a Sterling bank account would not be a problem as there would not be
any foreign exchange transaction costs for tax payers until any date that a Scottish currency was freely floated. However this will put pressure on people reluctant to re-denominate their bank accounts to the new Scottish Currency to do so as the end of the transition period approached as after the end of the transition period any tax or legal fine payments to the central or local government could attract a foreign currency transaction cost.
In a similar way to taxation, if all social security payments were made
in the new Scottish Currency this would help normalise the use of the
new Scottish currency; especially for payments made into a bank account
(which is mandated for Universal Credit). If all payments were made in the new Scottish Currency then this would ensure that the new currency was
quickly adopted; not only by welfare recipients but also by the business whose income depends on the trade from the welfare recipients. Thus based on activities entirely within its control (taxation and welfare) the Scottish Government could ensure the widespread use of the new Scottish Currency.
As there would be equivalence between the new Scottish Currency
and Sterling during the transition period then prices in shops would be the same on the first day that the physical Scottish Currency was introduced as they will have been in Sterling on the day before. This will ensure we avoid the creeping inflation that has taken place at the time of some other 52
a practical guide for Scotland
currency conversions (such as UK decimalisation in 1971). It will also make the conversion easier to understand as an item in a Pound shop costing
£1.00 will be priced at 1.00 ‘Scots’ once the new Scottish Currency has
been introduced. This will ensure that on the day of introduction of the new currency the new prices are easily understandable (they are the same as the old prices), costs to shop keepers are reduced (they do not need to re-price all their stock) and there is no scope for hidden price changes.
As with shop prices, on the final day of the transition period the initial price will not be different between a Sterling price and a Scottish currency price. However any commercial website that displayed prices would need
to be changed to indicate the prices are in Pound Scots rather than Sterling.
This could be done in one of two ways. If the website displays currencies in a number of different currencies (Sterling, Euro, US Dollars, etc.) then the new Scottish Currency will need to be added to the list of currencies and an exchange rate against the base currency applied.
If the website is previously only in Sterling then either the website will need to be amended to explicitly state that prices are in the new Scottish currency or enhanced to show prices in both Sterling and the new Scottish Currency (which will be the same initially but could be different if the Scottish currency floats). As prices (and stock) change over time then this would not be an onerous task for any business (as it can be assumed that no business would keep its prices the same indefinitely) except where it chose to introduce a separate Scottish website. However given that a number
of differe