The process to establish the Bank
The transition to a fully operational and independent Bank should start immediately. It should constitute an on-going process as the organisation is able to increasingly act as an independent and fully formed institution. Appendix D sets out the high level tasks required to establish the Bank and expand the range of its activity over time, with an initial target of a shadow year of operations in 2019-20.
Many of the required steps, such as engagement with State Aid and regulatory authorities, will involve an extended process that the Board and Executive Management Team will need to navigate to enable the Bank to commence activity and expand the range of its activity and should therefore be initiated as soon as possible to avoid delays as the organisation develops.
An important process is transitioning, integrating and building on the current public sector financing elements.
SG should use its existing powers and operations to begin to undertake some of the investment activity that will be part of the Bank in order to show progress and begin to build the portfolio of investments for the Bank. An important element will be to ensure coherence for firms looking for finance in Scotland, helping them see a difference in the strength of the offer.
Many of the activities set out below will be taken forward concurrently, so that by 2020-21 the Bank is able to start its activity as a fully independent and effective organisation. The key workstreams are:
- Legislation and corporate structure – drafting and passing considerations, including setting up of relevant companies
- Budgetary – capitalisation, including any dispensation from HM Treasury, and resource budget for the Bank
- Senior appointments – appointments of the shadow Chair, and Board and Executive Management of the Bank
- Business planning and internal governance
- State Aid and regulatory clearance.
Some of the key points in the set-up of the Bank and interdependencies are set out below.
The legislative process and formal set-up
Primary legislation is required to enable SG to formally establish the Bank. It is anticipated that this process could take 18 to 24 months, and should therefore be commenced during early 2018 to allow for sufficient time for the Bank to undertake activity in its own right by 2020-21.
While some shadow bank activity can take place prior to the completion of the legislative process, the Bank will only have a properly independent existence (including entering into contracts in its own right including the direct employment of staff or appointment of a formal Board) once the legislative process is completed.
Scottish Ministers will set the direction for the Bank and highlight missions that it should undertake. Initial drafting of an interim Strategic Framework should commence early to enable the interim Executive Management to develop an initial Business Plan that responds to the direction set by SG during the establishment and transition stage of development so that the Bank can operate in shadow form during 2019-20.
In order to achieve the operational independence envisaged and to be able to access private capital in due course, the Bank should be an independent legal entity. It is proposed that the Bank will adopt a Top-co structure with subsidiaries carrying out certain distinct functions. This enables these subsidiary entities to have the appropriate regulatory and State Aid frameworks for the functions they are performing, as well as ensuring State Aid compliance.
Management of the transition
The first stage in the transition should be the forming of a Project Team, including a project budget from SG, and a shadow Chair to deliver the transition. The project team and shadow Chair should be in place by Q2 2018.
An interim Executive Management Team would be established to oversee the activities to establish the Bank, transition of existing operations, development of appropriate corporate governance and operational structures, and commencement of new activities under the Bank’s remit in due course. These appointment should be made by Q4 2018, in advance of the shadow year of operations in 2019-20.
Once the Bank is fully established with its own independent legal existence, a permanent Chair, full Board and permanent Executive Management Team would need to be appointed through an appropriate process. The Board should establish appropriate Committees to govern the Bank’s activities. Executive Management will be responsible for putting in place effective risk assessment and investment processes and procedures. The Bank will likely be subject to the normal requirements of all public bodies (for example the Scottish Public Finance Manual) and will need to take account of such requirements in its internal policies and procedures.
An Executive Management team, will be led by the Chief Executive and will manage the day-to-day running of the Bank independent of SG. The Management Team should be established to ensure that it can cover the following four main functions within the Bank:
- Risk and compliance
- Financial management and treasury
- Asset management.
Preparation of an initial Strategic Framework and missions should commence early, to enable the interim Management Team to develop an initial Investment Strategy and Business Plan that responds to the strategic direction set by SG in the Strategic Framework.
The key task of the interim Management Team would be to develop a business plan that sets out how the different functions described above would be developed in the Bank, what investment activity it would undertake in its first years of operation, and how it would develop a balanced portfolio of investments that represents an addition to the Scottish financing landscape. This plan should also include the institutional development of the Bank and fit with the legislative process in setting out how the relationship with SG will work. It should be a living document that will develop as the Bank comes into being, gaining in complexity and depth as time goes on and more clarity is available to the Bank as to the appropriate nature of systems, etc.
While it will not necessarily be used as part of a formal regulatory clearance process in the first instance, best practice indicates what the Business Plan should cover – the key components of the Business Plan are set out within Appendix E.
Obtaining Financial Conduct Authority compliance
The Bank will need to demonstrate to the relevant authorities that it maintains high standards of governance in its management, as well as having the operational capabilities and infrastructure to deliver the proposed suite of products. If the Bank is established as an Asset Management firm it will be regulated by the Financial Conduct Authority (" FCA") prior to conducting any regulated activities. The FCA’s primary objective is to protect consumers, enhance market integrity and promote competition.
While it is unlikely that in the first instance the Bank would need FCA approval (though this may be necessary soon after the Bank’s set-up). The set of issues that the Bank needs to address should be the basis of the Business Plan that the management of the Bank will be tasked with developing, to ensure once activity commences, the Bank is capable of properly undertaking its activities and making investments.
As part of the compliance process, the Bank will have to demonstrate adequacy of capital and liquid resources, and develop contingency plans for recovery, resolution and business continuity.
State Aid clearances
It is anticipated that the Bank will be classified as a National Promotional Bank (" NPB") by the European Commission ("the Commission") for the purposes of State Aid. The Commission has set out guidelines for the activities of NPBs and outline the process for the Commission to approve the Bank. This is necessary to allow the Bank to commence activity in its own right as a formal independent organisation, but does not change the latitude given for different interventions, which remains the same for current member states. The Bank, is expected to be able to act through the General Block Exemption Regulation (" GBER") for risk capital, the Market Economy Operator Test (" MEOP"), and any schemes specifically notified to the Commission.
It is recognised that Brexit has created uncertainty in this area. The process to look at State Aid should be started by the Project Team as an early action, so that it does not become a block to speedy progress. The summary timeline, included in Appendix D, plans for up to 18 months for this process to be completed.
Recruitment of staff
The Bank needs to be highly professional and operate with very high standards of compliance and conduct. The Bank must be able to attract the right expertise into its management and delivery teams, given it will be competing for specialist staff with the private sector.
As well as financial and investment expertise, the Bank should aim to recruit or have access to a range of staff from other disciplines and specialisms, such as economists, statisticians, construction, engineering and scientific sectors. This is both to support its management and governance functions and to ensure there is sufficient knowledge of the sectors in which the Bank is likely to be actively investing  .
The culture of the organisation needs to be expert and professional in terms of operating in the financial markets, attracting appropriate, high quality individuals and ensuring very high standards of compliance and conduct. There will need to be a cultural balance struck between the organisation having a focus on delivering against stated public policy objectives, retaining focus on the mission, and attracting investment professionals with the appropriate skill and expertise.
The Transition Plan will be comprised of a series of workstreams required to complete the set-up of the Bank. These include: legislation, recruitment of an interim Executive Management Team, regulatory and State Aid compliance, further recruitment and alignment of relevant organisations. A key part of this will be the development of a detailed Business Plan by the management of the Bank.
Recommendation 18: In setting up the Bank, Ministers should appoint an independent shadow Chair as soon as possible, to oversee the work of a project team responsible for the transition and set-up of the Bank. A shadow Board and interim Management Team should be put in place prior to the Bank operating in shadow form in 2019.
Recommendation 19: Scottish Ministers should concurrently confirm the Bank’s initial missions and the first Strategic Framework, ensuring that the essential clearances and changes required are obtained from HM Treasury and others.
Recommendation 20: The Bank will need staff with the right mix of skills and experience to ensure its success and sustainability. The Scottish Government should ensure that the Bank can offer employment and remuneration terms which are sufficiently competitive to attract suitably skilled and experienced people.
Recommendation 21: The Bank should adopt a leadership role with regards to diversity and inclusiveness within its governance, operational arrangements and investment strategy.
There is a problem
Thanks for your feedback