By David Troman and Gavin Neilson, financial services experts
In September this year, there will be a referendum on whether Scotland should be an independent country. As the independence debate rages, it is clear that the matter is not straightforward for any part of society. For business, the uncertainty around an independent Scotland raises a number of questions and many kinds of risk.
In recent months, we have been approached by investment houses, banks and other financial services institutions – particularly those involved in capital markets – for guidance and support on the challenges ahead. In the event of an independent Scotland, they ask whether Scotland’s banking assets would be sustainable. Would its financial sector move wholesale to London? And they also ask whether, among the many risks, there are new opportunities on which they really don’t want to miss out.
In the run-up to September, the starting point for financial services firms must be to develop thorough and robust scenario plans to anticipate the contingency risks, domino effects and potential opportunities that a “yes” or a “no” would create for your business.
This scenario planning exercise will enable you to better react to any future situation and establish the contingency actions you need to take.
Understanding the present
Scenario planning begins by understanding your current situation and how potential future events may affect your business. In the case of Scottish independence, this ranges from the impact of Scotland being unable to keep the pound to the introduction of new regulations and tax rules.
After establishing the basics, you need to identify the succession of events that would lead to a direct impact on your business. For example, if you wanted to quantify the impact a new Scottish currency might have on your business, you should first identify the steps that the country would have to take to launch the currency. Analysing the impacts of the new currency – eg the value of exports becoming increasingly volatile due to the low liquidity, high volatility of a new currency – you can see the value in a hedging strategy to reduce investment risks.
Plotting the course for the future
Once you have understood the likely impact of different scenarios on your business, you need to define an operational risk mitigation plan for each situation, combining all hazard interdependences into several likely outcomes. You then need to start building the strategic relationships that give your organisation the options necessary for long-term success. You also need to be prepared to move fast on those strategies which are robust under a range of different scenarios.
As balance-sheet strength defines sustainability, for example, you should be prepared to vary your ratio of debt to equity to lower your funding risks in a volatile market. By increasing cash reserves, not only will you derive healthier capital ratios, but you will also reassure your customers that you have deep pockets in emergency situations.
We can help you model strategies and determine sets of actions by drawing on our analysis experience and industry expertise. We have already used scenario planning to create exceptional results for financial services businesses. For a major commodities exchange, which was considering a sale to another exchange, we outlined the potential impact that five market scenarios would have on its trading volumes and ultimate sale value. These scenarios included the implosion of the euro, a fall in commodities demand from China and the rise of a powerful direct competitor. This analysis helped us show that the exchange was more valuable than previously thought, which led to its sale at a price that was one billion pounds higher than expected.
Scenario planning lends itself perfectly to situations where the potential outcomes are known, but the implications remain uncertain. As the Scottish referendum draws nearer, it can help you prepare your business for whatever is to come.
To find out more, contact us now.