Scotland needs to rediscover its spirit of adventure

By Ian Fraser

Sunday Herald

February 20th, 2000

Henry McLeish, who this week will throw his weight behind a bandwagon developing to transform Scotland into the back-office capital of Europe’s financial services industry, may be backing the wrong horse.

On Wednesday, the enterprise and lifelong learning minister will address a seminar on the subject at the Royal Society of Edinburgh. He is expected to announce several educational initiatives that will ensure we have enough young people with half a brain capable of filing a share certificate and more.

In recent months, global financial players such as HSBC, Deutsche Bank, Bank of New York and State Street Bank have committed themselves to carrying out their investment administration in the capital – provided the UK tax regime remains favourable. Warburgs may be the next in line.

But what exactly is “investment administration”? And is it wise for Scotland to be putting so many of its eggs in this basket as the 21st century dawns?

Investment administration sounds tedious and, despite the tone of its evangelists – who argue it is no longer the Cinderella of financial services – it is essentially mundane and low-paid clerical work.

Investment decisions are taken by higher-paid, “front office” staff on Wall Street, in Frankfurt and the City. In some cases, these decisions will still be taken by Scotland-based fund managers.

However, the serried ranks of investment administration workers in Edinburgh and at South Gyle – 850 of whom work for Deutsche Bank’s WM subsidiary alone – are merely there to mop up the paperwork afterwards.

Investment administration includes “performance measurement” which does require some IT skills, and “custody”, which means taking care of share certificates on an investor’s behalf.

A custodian is responsible for everything arising from ownership of these certificates, including collecting dividends, voting at meetings, exercising rights and so forth. But with salaries of £18,000 plus, such people are really glorified clerks and can expect to earn about one-tenth the salaries of their decision-making peers.

“These are the financial services equivalent of the sweat shop,” warned one Scottish professional last week. “It’s semi-skilled labour, and a bit like outsourcing your accounts department to India at one-third of the cost.”

Building on Scotland’s reputation for sound finance obviously makes sense, and it is helping create a large numbers of jobs, but these jobs are fragile.

Potentially, back offices are the service industry equivalent of screwdriver plants – as easy to remove as they are to create. If, for example, it became more viable for an international bank to carry out its investment administration in New Delhi, the institutions at the top of this column could, at the drop of the hat, relocate there.

The Irish, ever quick to jump on a job creation bandwagon, have already been trying to lure some of the Edinburgh-based operations to the Emerald Isle with lower tax rates.

Wouldn’t McLeish be better off seeking to recreate the sense of adventure that enabled Scottish finance houses to play a leading role in the railway revolution of the early 20th century, funding railroads in Argentina and elsewhere? Outwith the headquarters of the two Scottish banks, this sense of adventure seems to have been all but extinguished.

Copyright SMG Sunday Newspapers Ltd. 2000

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