How will the UK’s legal system change if the Scots vote yes?

So the big vote is today. Scotland may decide to become independent – but what will be the legal and commercial impact?

Why is Scotland holding a referendum?

The Scottish National Party (SNP), led by the First Minister Alex Salmond, won an unprecedented majority in the devolved Scottish Parliament in 2011. As part of its manifesto, the SNP pledged to pass a bill, which would legally allow a referendum to take place on the agreement from the UK government. The Prime Minister, David Cameron, agreed one should take place.

On 18 September 2014, Scotland will be asked ‘should Scotland become an independent country’ by voting “yes” or “no”. A “yes” vote will see Scotland leave the UK to become an entirely new country. A “no” vote will see Scotland remain part of the UK but with greater powers for decisions through devolution on issues such as childcare, health and policing. Scotland will also continue to have financial power following the Scotland Act 2012.

What happens if Scotland becomes independent?

Both the UK and Scottish government leaders have said that even a narrow “yes” vote in the referendum would be decisive and would lead to transition period where negotiations on the terms of separation would be finalised. The Scottish government has proposed March 2016 for independence but this is not legally binding and will only happen if Scotland and the UK have resolved all institutional, bureaucratic and legal issues beforehand. An independent Scotland would also have to apply to all the international organisations it wished to join and establish its own institutions.

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How will a “yes” vote affect the UK’s legal system?

A “yes” vote will bring broad ranging changes. At present, Scotland has its own legal system, with  distinct courts, including independent courts of appeal – the High Court of the Judiciary for criminal cases, and the Court of Session for civil cases. The Supreme Court of the United Kingdom is currently the highest civil court of appeal for Scotland. However, if Scotland vote “yes”, it would no longer be the highest Court of Appeal.

The Scottish government have made it clear that if Scotland was to become independent, the highest courts in an independent Scotland will be the Inner House of the Court of Session and the High Court of Justiciary (sitting as Court of Criminal Appeal), jointly known as the Supreme Court of Scotland. This would replace the UK Supreme Court for Scottish civil cases. It has also said that the European Court of Justice in Luxembourg and European Court of Human Rights in Strasbourg will continue to have the same jurisdiction in Scotland.

However, negotiations on how the Scottish courts and justice system would be structured will not take place until after the referendum.

What impact would a “yes” vote have on certain legislation and industries?

Energy

One of the central talking points of the Scottish independence debate has been the oil and gas industry. If Scotland says “yes”, the two governments will need to agree the division between Scottish and the remainder of the UK waters in order to establish which oil resources (and therefore tax revenues) fall within which jurisdiction. Dividing these could be on a geographical basis using a median line or to draw a line from the Scottish land border straight across the North Sea.

A number of administrative organisations have jurisdiction over North Sea operations, most notably the Department of Energy and Climate Change and the Health and Safety Executive.

In the event of a “yes” vote, Scotland would need to rapidly establish equivalent organisations, which could prove to be a complex process involving the transfer of large volumes of information and heavy recruitment of staff in what is already a competitive industry.

Another issue is who will take responsibility for decommissioning redundant off-shore facilities. The decommissioning discussion centres on whether the (rest of the) UK should contribute to the decommissioning costs of old oil and gas fields in Scotland or whether Scotland should assume the whole of this burden.

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Financial services regulation

At present the UK is governed by a single regulatory framework set out in the Financial Services and Markets Act 2000 (FSMA) which extends to England, Wales, Scotland and Northern Ireland. Financial services firms that are regulated under FSMA are supervised by the Financial Conduct Authority (FCA) and, in certain circumstances, the Prudential Regulation Authority (PRA).

If Scotland were to vote yes, FSMA would not apply in its jurisdiction and therefore, Scotland would need to create its own financial services regulator(s) or replicate the regulatory framework with Scottish versions of FSMA, the FCA and PRA. It maybe possible for the FSMA to apply to an independent Scotland if the UK agree to share its regulators but how this would work in practice remains unclear.

As the UK’s financial services regime is very heavily influenced by EU legislation such as the Markets in Financial Instruments Directive, the Capital Requirements Directive IV and the Transparency Directive an independent Scotland that joined the EU would develop its own financial services legislation that was broadly similar to England’s and financial services firms licensed in Scotland could provide services in England (and vice versa) under what is known as the EU passport.

However, it is far from clear that an independent Scotland would be able to join the EU and if it did not, it might be difficult for firms to provide cross border financial services between Scotland and England.

Employment

A “yes” vote is unlikely to result in employment law changes overnight. Much of the UK’s employment law is driven by Europe and that would apply to an independent Scotland in the same way as it would to the rest of the UK, providing it joins the EU.  Scotland also has a different legal system to a certain extent, with employment tribunals operating differently.

However, given the general policies of the SNP, we could expect its approach to be more friendly to employees than employers, with greater rights for employees. SNP currently propose establishing a Scottish Fair Work Commission to advise on the minimum wage and on other factors relating to individual and collective rights; a 90 days consultation period for redundancies affecting 100 or more employees would be restored; a commitment to increase the minimum wage at least in line with inflation and the abolition of the UK’s Shares for Rights scheme.

Tax

If Scotland was an independent nation, it would be entitled to create its own system of taxation. This would include levying and setting the rates for taxes on income, profits and gains of individuals and businesses in Scotland (“direct” taxation) as well as other, “indirect” taxes, such as stamp duties, VAT and insurance premium tax (it is already creating its own equivalent of stamp duty land tax, called “Land and Buildings Transaction Tax”, which will come into force from April 2015 regardless of whether Scotland gains independence or not and will replace stamp duty land tax in Scotland).

However, if Scotland was to become a member of the EU, it would be obliged to comply with EU law relating to taxation – for example, it would be obliged to introduce VAT in accordance with EU law.

Currently the UK has a large number of tax treaties with other countries which seek to deal with tax issues that can arise in relation to international transactions. For example, these tax treaties can be beneficial in reducing the rates at which taxes are withheld from payments between people in different countries, such as interest, dividends and royalties.

In principle Scotland would no longer benefit from these treaties and Scotland would have to negotiate new treaties or seek to agree that existing UK treaties would still apply to Scotland after it became independent.

Competition

If there is a “yes” vote, Scotland will have to have its own competition authority after the 18 month transition period.

It seems likely that it would retain the same types of law as in the UK Competition Act 1998 (and it might even just adopt that act with suitable amendments), particularly as it intends to apply for EU membership and it would have to have similar law because they are harmonised with EU competition law.

The big question is the EU and Scotland’s EU membership. There is no guarantee that Scotland would achieve EU membership within the 18 months, i.e. by March 2016, and that raises all sorts of questions about the application of EU competition law to businesses based in Scotland.

Robert Hamill is a partner at Mayer Brown.

Mayer Brown competition partner Gillian Sproul, tax partner Sandy Bhogal, tax senior associate Simon Slade, financial services regulation partner Mark Compton and employment partner Stefan Martin also contributed.