Oral evidence - Brexit: Crown Dependencies

Examination of witnesses

Professor Alastair Sutton, Professor St John Bates and Professor Andrew Le Sueur.

Q13 The Chairman: Good afternoon, gentlemen, and welcome. Make yourselves comfortable. We have three distinguished lawyers in attendance this afternoon, all of whom it is fair to say have an interest in European law and the Crown Dependencies, which is very much the subject of our study. Mr Sutton, you have an interest in British Overseas Territories, which is not specifically our remit, but we are always in the market for people who want to add interesting examples and so forth, because of course this is part of a general body of work on how it affects bits that are not perhaps always well understood in Whitehall and need to be brought out and for concerns to be registered. There will be a degree of freedom in that respect, and I am sure that will also apply to our questions.

Just to be clear, this is a public evidence session, so it will be webcast and eventually made publicly available. People may attend the gallery. We will, in accordance with our normal practice, send you a transcript at the end for the correction in the event of any factual queries.

Unless you want to make advance statements, it would be simplest if you introduce yourselves from my left to my right, as it were, and then we will kick straight off with the questions.

Alastair Sutton: I am Alastair Sutton. I am a door tenant at Brick Court Chambers practising European Community and European Union Law from London and Brussels. It is relevant that I also say that for a number of years—actually from 1989 until I retired from a law firm six years ago—I was the European or Brussels adviser to the three Crown Dependencies. Over the last six or seven years, I have been advising the Government of Bermuda. The Crown Dependencies established their own offices in Brussels when I retired and they do their own work now in Brussels, but I did it for some 20 years.

Professor Bates: I am St John Bates. Aside from my consultancy company, which is advertised in front of me, I still do a little law teaching but, like some of my colleagues, as a professor emeritus. More pertinently, for some years I was the Clerk of Tynwald and Counsel to the Speaker in the House of Keys. I heard your initial comments. I wonder if I could be allowed to make some very brief observations.

The Chairman: Of course, yes. If you feel more comfortable with that, do that now.

Professor Bates: This is really prompted by Protocol 3, which you are obviously very familiar with. I suppose Protocol 3 can be described as short, limited in scope and somewhat telegrammatic. One reason for that was that until quite a late stage of the accession negotiations the UK Government’s position to the Dependencies was effectively, “We are in the middle of difficult and complex discussions. Because of that, either you are going to have to be treated as part of the UK or you are going to have to stay out entirely”. It was only at a late stage that Protocol 3 was drafted and Lord Rippon eventually relented.

I mention that because it is somewhat symptomatic of the UK’s approach at the time, and I have to say even on occasion in more recent years, where the Government has a perhaps understandable tendency to lose the Dependencies in the heat of wider issues, and also, somewhat less understandably, to be rather cavalier in their attitude to Dependencies on some occasions. Although things have changed a little bit now, I believe that the Crown Dependencies perhaps would be advised to be slightly less benign than they have appeared to be in public and to just remember that default position.

I mention that because of three indicators. Despite the assurances, when the Prime Minister made her speech earlier in the month, there was no reference to the Crown Dependencies or Overseas Territories in that speech, although notably there was of course reference to the devolved Administrations. Another indicator is that, as I understand it, the Crown Dependencies have no direct access to the Joint Ministerial Committee—EU negotiations, although they are, for example, members of the British‑Irish Intergovernmental Council. The other point I would make is that the recent Supreme Court decision in Miller somewhat reinforces legally, if not politically, this more detached approach by the UK Government.

There are three final positive things that need to be said. The first is that, in the 40 years since the accession agreement, all the Crown Dependency Administrations have become more sophisticated and more professional in their approach. The Isle of Man, for example, has published three scoping reports so far—two before the referendum and one after—on the Manx implications of Brexit, although to date there has been no public indication of what they seek to achieve as they are just scoping reports.

Secondly, both the UK and the Crown Dependency Administrations have made significant efforts to establish good lines of communication in the run-up to Brexit, although, as I think was indicated in previous oral evidence that you took, those lines of communication tend to unravel in the heat of hot negotiations.

Finally, if I may say so, another important factor is that Westminster is taking a lot more interest now in the Crown Dependencies, both this Committee of course but also in recent years and currently the Justice Committee in another place. Thank you for your patience.

The Chairman: Thank you for that. That was helpful and those are themes that we certainly wish to return to. In order to preserve equality of arms, as we denied you an initial statement, Mr Sutton, do you want to chip in or add anything else at this stage?

Alastair Sutton: I will try to be very telegrammatic, if I may.

The Chairman: Thank you. That is always appreciated.

Alastair Sutton: The first thing, which is rather obvious, is that 2017 to 2020 is very different from 1970 to 1973. The economies of the islands have completely changed. They were then dependent on agriculture and horticulture whereas today the shift is very much towards financial services. The international profile of the islands has completely changed. They are now full members of the Global Forum, for example, participating in the OECD’s work in that respect, so that is a complete change.

The international climate has completely changed, following, notably, the crisis in 2007 and 2008, with a focus on tax and financial services and the regulation and supervision of tax and financial services. As a result of all these things, all the Crown Dependencies and the Overseas Territories face challenges as a result of international action in the G20, the OECD, the IMF and, perhaps most pertinently for this hearing, in the EU itself. Brexit is only the latest challenge. Whether it is a more formidable challenge than, for example, the islands’ reputation on tax matters is an open question.

What are the options facing the islands? We have read the evidence given to your Committee by the Chief Ministers and that was in effect to maintain the status quo if possible. Perhaps we will come on to that later with questions and so on, as to whether that is possible or not. However, a number of other options are possible. One is increasingly struck by the difference—I was going to say disconnect—between UK policy in financial services and taxation and the policy in each of the individual Crown Dependencies and Overseas Territories, such as Bermuda, the Cayman Islands and the BVI. There is a difference. Of course, under public international law and constitutional law, the United Kingdom is responsible for the international relations of its Crown Dependencies and Overseas Territories, and I would not wish to say that the United Kingdom does not take those responsibilities seriously.

However, when it comes to defending a particular tax regime or a particular piece of asset management legislation, it is not easy to do that for the Foreign Office or for the Treasury or for the Justice Ministry if they have to deal with six or seven separate jurisdictions with separate and different legislation. It is not easy for them to go to Brussels in the Code of Conduct Group and put one hat on and say, “Mr Chairman, I am speaking on behalf of Jersey”, “Oh, now I am speaking on behalf of BVI”, and “Now, I am speaking on behalf of Bermuda”.

The need for the islands to be able to better defend their interests internationally is quite urgent. That would require a greater degree of entrustment by the United Kingdom so that they can conduct their own affairs in fora such as the OECD and particularly the EU. The EU is now, in this year of 2017, going through a so-called blacklisting process where serious damage to the economies of Jersey, Guernsey, the Isle of Man and perhaps Bermuda, Cayman and BVI could be done if the EU blacklist these Territories despite the fact that they have ticked all the boxes internationally in the OECD for compliance with tax, anti‑money laundering legislation and financial regulation.

In my view—and I stress that this is my view and not the view of the islands—a greater degree of entrustment and autonomy is needed, mirroring rather what Hong Kong used to have in the old days when they negotiated independently in international economic fora.

The final point is that it may be time for all the Crown Dependencies—I am not sure about the Overseas Territories, but certainly the Crown Dependencies—to think about membership of the World Trade Organization. I say that because if, God forbid, there is a hard Brexit and this country relies on the WTO for international trade, it would be disadvantageous for Jersey and Guernsey not to be in the WTO and to be able to rely not only on the substantive rules but on the dispute settlement procedures in Geneva.

Thank you very much. I hope that was not too long.

The Chairman: Thank you. I have noticed Lady Falkner, who will have a supplementary, but in fairness to the patient Professor Le Sueur we might allow him any opening remarks he wishes to make and also to introduce himself formally to the Committee.

Professor Le Sueur: Thank you very much. I am Andrew Le Sueur. I am professor of constitutional justice at the University of Essex. I have one very short preliminary point to make, which is the importance of remembering that there are five Crown Dependencies. The position of Alderney and Sark is often overlooked in debates such as this because they are relatively small, they fall within the Bailiwick of Guernsey, and the Government of Guernsey act on their behalf in relation to dealings with the UK Government. However, they are each in their own right a Crown Dependency.

It is instructive to look back at what happened in the 1970s when discussions were taking place as to what the UK’s relationship should be with the EEC. Each of the Channel Islands initially had a different view as to what it wanted its own relationship to be. It is not entirely clear to me that in the current Brexit process the constitutional formal arrangements for ensuring that the two smallest islands have a voice are in place. It was important that the Ministry of Justice, in the final paragraph of its evidence to the House of Commons Justice Committee, acknowledges this and really delegates it as something to be dealt with by Guernsey. I would say that the smallest islands should not be overlooked.

Q14 Baroness Falkner of Margravine: My comment is to you, Professor Sutton, and your opening remarks. I chair the Financial Affairs Sub-Committee of this Select Committee, and our impression in the sub-committee is that the Treasury is very cognisant of the particular positions of the Crown Dependencies, particularly with regard to BEPS and the common consolidated corporate tax base legislation, because we constantly scrutinise the Treasury’s work in Brussels and see that they lodge timely objections when it comes to it. Could we be getting to the stage, in terms of this Prime Minister’s and the previous Prime Minister’s commitment to clamp down on corporate base erosion and profit shifting and other activities, where your interests are now diverging from the United Kingdom Government’s, as the United Kingdom seems to have a greater commitment to “cleaning up the system” and that maybe you are feeling, if I could put it this way, unloved because your interests are diverging rather than the Treasury not being cognisant of your point of view?

Alastair Sutton: Thank you very much for the question. I should stress that today I am not employed, as it were, by any of the Crown Dependencies or indeed as a civil servant of Bermuda. These are my views that I am expressing.

Let us go back very briefly to 2000 when the EU decided to make new proposals on taxation and decided to extend those extraterritorially in the first instance to the Crown Dependencies. The reaction of the Crown Dependencies at the time was to say, “We signed up to Protocol 3 and therefore we did not sign up to EU harmonisation proposals in taxation. These do not apply to us”. At that time, pressure was brought to bear on the Crown Dependencies to accept the disciplines that the tax on savings directive imposed, and indeed when they accepted that they negotiated agreements with each and every member state for the exchange of information under the tax on savings directive.

The next step was the code of conduct on harmful business taxation, which was extended extraterritorially to them despite the provisions of Protocol 3. They also submitted their corporate tax law to the Code of Conduct Group in Brussels, and their corporate tax legislation, after some discussion, was approved in Brussels by the Code of Conduct Group. That was a unique occasion when a representative of Jersey was allowed into the room to sit next to the British Treasury to explain Jersey’s zero/ten corporate tax legislation. That is the only time, to my knowledge, that a representative of a Crown Dependency or an Overseas Territory had been actually allowed into the room to defend their own interests.

I am sure that you are absolutely right that the Treasury has defended the islands when they have made efforts to comply with the voluntary exchange of information on request, the automatic exchange of information under the OECD last year and now BEPS. The problem with BEPS—base erosion and profit shifting—of the OECD is this. It is not so much what the OECD has proposed. I have accompanied the Finance Minister of Bermuda to see the Secretary-General of the OECD, and Mr Gurría has said that the BEPS project is aimed at OECD member states such as the United States to apply their tax legislation in such a way that multinationals are not able to park their money, if I can use an imprecise term, in places like Bermuda. “It is up to the United States. We are not targeting Bermuda”. Therefore, Bermuda are now part of the inclusive framework of the BEPS project and so on. That is fine. Internationally, I think Jersey, Guernsey, the Isle of Man and Bermuda are on the right side of the fence, if I can put it that way.

The problem is that there is a political drive in the European Union, led by Commissioner Moscovici, to deal with what they call “low, no or zero tax jurisdictions”. Ever since I was Lord Cockfield’s legal adviser 25 years ago it has been an absolute axiom of EU tax law that the EU is not trying to harmonise tax rates. Tax structure is another thing. You have mentioned the CCCTB project. However, rates are a matter of national fiscal sovereignty. However, Moscovici has tried, latterly in the ECOFIN last Friday, to persuade the member states to establish a criterion for blacklisting of no, low or zero tax. Of course, this will affect all the Crown Dependencies and places like Bermuda, which has no corporate tax. They raise money for public purposes like hospitals, schools and infrastructure in their own way but they do not tax corporate profits.

The EU are now going further than the OECD and the BEPS and establishing a list; they are currently examining 92 jurisdictions, believe it or not, including the United States, for compliance with their criteria. We will have to see what happens. However, it is the unilateral nature of the action by the EU and the absence of due process in the sense that there has been until now no dialogue with countries like Bermuda or Jersey on the basis upon which these punitive measures are likely to be imposed.

My preface was not to condemn the British Treasury—that is absolutely clear—but it is difficult for them to defend the detail of all the Overseas Territories if there are seven or eight of them in the dock at the same time.

The Chairman: Professor St John Bates, do you want to add anything at this stage?

Professor Bates: You have taken an interest in what might happen post Brexit in terms of the UK protecting the interests of the Crown Dependencies as low tax jurisdictions. It is obviously going to be seriously weakened post Brexit and it might be exacerbated by what appears to be a move to project the UK itself as a low tax area. Rather than being threatened by the UK, I think we need to feel challenged before too long.

I will just make one other point, which is slightly outside your inquiry but illustrates the same representation. Depending on how enthusiastic the present UK Government are to leave the Council of Europe, we might have a similar situation with MONEYVAL. I am sure that they are not going to leave the Council of Europe, but their position in protecting the Crown Dependencies, and perhaps themselves, in the MONEYVAL arrangement might be weakened too.

Q15 The Chairman: Thank you for recording that. That has been very useful in opening. We are, as it were, getting on to our formal lines of questioning in a minute. As I read it, there are two concerns. First of all, all three of you identified that financial services are now essential to the economy. Certainly when I was last in Guernsey I saw vineries that were no longer in use whereas I had known tomato growers in Guernsey in historic times, so that is part of this.

In terms of representation, you were both making the point that constitutionally you form a small part of a big negotiation with the United Kingdom, and, looking at financial services, your interests may not be exactly coincident with the United Kingdom, although obviously they do their best to represent you. These all create some tensions. You are nodding and that is helpful, but in fairness we will ask Andrew Le Sueur to come in on what, in a sense, was my opening formal question—and it feeds into this—which is whether you can give us a brief summary of the main political and economic implications for the Crown Dependencies, scoring them out of five if you wish, of the UK’s decision to leave the EU. Where does the rubber hit the road when this actually happens alongside the other issues that we have already touched on?

Professor Le Sueur: I would draw a distinction between two types of impact. We can look at the immediate and direct implications, and I will leave my colleagues to deal with those. I would also like to flag up some of the more longer-term and indirect consequences. Brexit has a real capacity to be a catalyst for change, and I think that will be driven forward if the islands feel that they are not being listened to or well represented under current arrangements. We can envisage a range of future directions of travel.

One thing that may happen is that the islands may feel that it is advantageous to their interests to work closer together. One could imagine, for example, a confederation of the Channel Islands. We have, perhaps in very embryonic form, already seen some signs of this with the Channel Islands office in Brussels where officials work for two of the Crown Dependencies and the joint Data Protection Commissioner.

The Chairman: The events of 1644 may be fading into memory.

Professor Le Sueur: Quite. A more radical step forward may be the idea of a federation if, as single Crown Dependencies, the island governments feel their voice on the world stage is no longer best represented.

Even more radical still is the possibility of independence if the islands feel that their interests are not being well represented in Westminster and understood in Westminster and given effect to in Whitehall. Contingency planning has been taking place in Guernsey and Jersey for a number of years now to work out how independence might be achieved, how much it would cost and what the implications would be. Those are some of the longer-term catalysts but perhaps I should leave the more immediate impacts to my colleagues.

The Chairman: Can I just come back to one political scientist point in this, if I may? Is there any suggestion that there is a strong body of public opinion, in the Channel Islands at least—I am not asking you to speak for the Isle of Man—towards that train of thinking? Is it the kind of thing that features as the newspapers or people poll and take percentages?

Professor Le Sueur: No, the opposite is the case. It is very much a project driven by political elites, including lawyers.

Baroness Falkner of Margravine: We know about those.

The Chairman: On that tantalising note, we ought to get stuck into the main business. I will ask Lord Jay to come in now.

Q16 Lord Jay of Ewelme: Can I just ask one general question before we get on to those? It seems to me that two possible responses have come forward so far as to how we ensure that the interests of the Crown Dependencies are taken into account. One is to have a more coherent system in Whitehall to ensure that they are properly taken into account and it is not divided, as it is at the moment, between the Home Office, the Treasury, the Foreign Office and so on. The other is to devolve more to them so that they can do more for themselves. I wondered whether each of you could say which of those two models seems to you to be a better one.

Professor Bates: You would probably need a combination of both. My experience, when I was working for the Isle of Man Parliament, was that, despite the fact that these constitutional arrangements with the Isle of Man have been in existence for nearly 300 years, it was amazing how often people dealing with the Isle of Man did not really understand the basics of the constitution arrangement. There are all sorts of Whitehall memos that say, “If you mention the Isle of Man, don’t forget to do this, that and the other”. That could be improved.

The other two things I would say is that I do not sense any move in the Isle of Man, even in the fairly distant future, of seeking independence for all sorts of reasons. I am sorry; I forgot your other alternative.

Lord Jay of Ewelme: It was to devolve more power to them or to bring more power to us at Whitehall.

Professor Bates: There is an interesting pattern to that. We discussed various pressures on double taxation agreements and exchange of tax arrangements. One of the knock-on effects of that was that the quite limited constitutional convention of the Crown being responsible for foreign affairs has been softened in that there is delegated competence, for example, for the Isle of Man to enter into these—effectively—treaties. It is delegated but it is quite frequent.

Another example a few years ago is where I suspect that the UK Government might have tired a little of getting the Crown Dependencies, particularly the Isle of Man, into line on international human rights. There was a report on the UK and its Dependencies from the UN Committee on Human Rights and, rather to the surprise of the Isle of Man, they were invited to go and respond to it themselves, which was an unusual external representation. I see that this might develop, because if post Brexit the Crown Dependencies pursue a position that is not exactly the UK position, the UK Government would say, “Off you go and do it, but you can do it yourselves”. I can perhaps see the external relations competence growing through pressure. I do not see somebody sitting down in Whitehall and saying, “Gosh, we’ll just keep defence and we’ll give them external relations”, but I can see a pressure to soften the exclusivity of that.

Alastair Sutton: My view would be that the machine in Whitehall works rather well, although it is slightly odd at first sight to see that the Foreign Office is responsible for the Overseas Territories and the Justice Ministry is responsible for the Crown Dependencies, and that most of the issues these days are the responsibility of the Treasury, but the machine works.

Lord Jay of Ewelme: Or Defra.

Alastair Sutton: Or Defra, exactly. That is more important for the Isle of Man than it is for Jersey or Guernsey, or for Bermuda, Cayman, BVI and so on. The issue of devolving greater competence on the jurisdictions would help, although one has to be aware of the resource limitations that all of them face for representing their own interests internationally.

The other point is that under international law it is all very well for the United Kingdom to devolve greater autonomy on, say, Cayman Islands or Bermuda or Jersey, but that has to be then recognised by the international community. It is a fact that most organisations—the EU certainly but also the OECD and the IMF—are open to sovereign states. What has actually happened for the Crown Dependencies and the Overseas Territories is that, where you have organisations for supervisors’ co‑operation such as IOSCO or the IAIS or the Basel Committee, they are fully represented. The same is true even of the FATF, the Financial Action Task Force. They are well represented there, so I think the system is not too bad the way it is. As I say, the problem is that, when international pressure is brought to bear on the Territories to adopt rules, which it is in the United Kingdom’s interest that they do, there is political pressure brought to bear that they should align with those rules even if in law they have a discretion over whether or not to do so.

Professor Bates: If I could just intervene with my first experience, when I went to the Isle of Man, the Home Office was the lead department for the island and I went along to see the relevant official and we went through all the usual things. I said to him, because I thought it probably was not a full-time job for him, “What else do you do?”, to which, rather surprisingly, the answer was, “I am responsible for British Summer Time and organising the Cenotaph ceremony”, which seemed to be a rather disparate set of tasks.

Q17 Lord Jay of Ewelme: When I was ambassador in Paris, I found it extremely difficult to find anybody who would be prepared to take responsibility when Guernsey had a fisheries row with France and I had to do it myself. It was the same sort of thing.

Could we get on to something a bit more specific? Professor Bates, you mentioned Protocol 3 in your introduction. Would it be possible for the UK to negotiate a continuation of the current Protocol 3 arrangements as part of the Brexit negotiations? Is that a feasible prospect and, if so, do you think that the precedent set out in differentiated EU integration, or variable geometry as it is normally called, would help that, or would there have to be some completely new arrangement whereby the devolved Administrations looked to some other member state to act for them in negotiating something? How do you see this?

Professor Bates: The idea of just promoting Protocol 3 is not a runner because most of the things in Protocol 3 are not going to be in any likely Brexit agreement such as customs matters, quantitative restrictions or free movement of persons. That is not going to be there so I cannot see how it can be in Protocol 3.

I was contemplating this and I have to say that I do not know the answer. One of the articles in Protocol 3 relates to applying the Euratom treaty to the Crown Dependencies. I am afraid that I have not caught up with the UK’s Government’s position on the Euratom treaty, but I assume they are going to continue it.

As far as other member states are concerned, again, I find it difficult to envisage either the EU or another member state promoting any aspects of Protocol 3 on behalf of the Crown Dependencies. I cannot see what would be in it for them, to be honest. If they are looking for reasons to slap the UK Government on the wrist, it looks like a good thing to slap them on. I cannot see there being any prospect of that, to be honest.

Alastair Sutton: Could I add two things that are slightly different from my friend on my left? The first thing is that when we leave, the day the treaties cease to exist will be the day Protocol 3 ceases to exist simultaneously with all the other treaty arrangements. Therefore, from a purely legal point of view, running it on is not an option.

My second point is on substance. What we hear—and we have not heard a great deal—suggests that we are moving towards some kind of free trade arrangement, perhaps on the Canada model, although we do not know yet what will be in the free trade agreement. However, at least the free trade in goods will be in the free trade agreement. The free trade agreement will of course be a free trade agreement and not a customs union agreement; therefore the Channel Islands and the Isle of Man are currently in the EU customs union and they are in for free movement of goods. On this hypothesis, we will lose the customs union aspect, but it would be possible for the United Kingdom, quite seamlessly I would say, to add on to its own negotiations of a free trade area a protocol similar in scope to Article 1 of Protocol 3 anyway, which would continue what the Chief Ministers of the three islands wanted, that being a continuation of the trade in goods, i.e. horticultural, agricultural and even manufacturing if possible.

The big issue, of course, is services. The Chief Ministers of the Crown Dependencies are content with the status quo. Now, I could imagine that the United Kingdom will of course seek a free trade agreement that will cover services. The question then for the islands would be: do we align ourselves with the United Kingdom and say, “We will accept whatever you can negotiate in terms of market access”, or, alternatively, “Do we want you to negotiate a separate arrangement in our name?” I think that would be extremely difficult but it is possible. Thirdly, they could say, “We entrust you, the three islands, to do your own negotiations with the EU”.

I will just comment on the idea of the status quo continuing, because that may be a later question. I said right at the very beginning that 2017 to 2020 is very different from the days when we were applying to join and six member states were welcoming us with open arms. That is not the case today. There will be a question of political will amongst the 27 and the three institutions as to what, if any, deal they want to offer to these islands, because there is a tendency in Brussels at the moment to look at the periphery of the European Union, to states like Andorra, Liechtenstein, San Marino, and even Switzerland, the African states and the Balkans, as having to conform to the sort of level playing field idea. The idea of doing sui generis ad hoc deals with small non-sovereigns is very difficult to imagine, and I wonder whether the political will would be there for it.

Question: what happens with all the equivalence arrangements that have been granted by the EU to Jersey, Guernsey and the Isle of Man in areas like data protection? Legally, there is no reason why they should be affected because all the Overseas Territories and Crown Dependencies are effectively third countries. We do not need a great repeal Bill because we are third countries. We have only adopted whatever EU legislation we feel is in our interest.

The unanswered question is: has the EU granted equivalence to Bermuda on insurance and reinsurance because Bermuda is an Overseas Territory of a member state? We do not know the answer to that. The legal text makes no mention of the United Kingdom at all. What I can say is that the EU has acted in its own interests in granting equivalence, for example on asset management. If they grant equivalence to Jersey, that will be because it is in the EU’s interest to permit the free flow of capital from Jersey, Guernsey and the Isle of Man into EU markets. I am afraid there are some grey zones where we do not quite know what the outcome will be. It is in the lap of the gods.

The Chairman: Inevitably we will go back to financial services a little later, but I wonder if I could ask Andrew Le Sueur if he wants to comment. I have two comments of my own that perhaps he would like to respond to. The first is: is there any appetite for the argument that if you are concerned as an EU 27 to harmonise the “stamping out” of abuses or whatever, it would be better to have the Crown Dependencies included in some agreement because you can keep your eye on them, rather than free-standing? That is the general scoping point.

The second more specific point—and I confess that, not being a lawyer myself, I am not too clear on the details—is that I think the domestic law of the Channel Islands at least is influenced by French or Norman practice and indeed includes the odd words in Norman French that we no longer use much in English law. I wonder whether there have been any consultations about what I could term the professional level with continental lawyers about how they might view this and how one might sensibly harmonise the approach with them.

Professor Le Sueur: Most of the law of Jersey that draws its roots from Norman customary law—the law before Napoleon codified everything—is generally outside the scope of EU matters. It tends to be matters to do with intestacy, buying and selling land and so on. I do not know, on the whole, whether it is very relevant.

One ongoing problem for Jersey is the lack of a comprehensive law of contract. We borrowed, magpie-like, from a number of different sources including French civil law and English common law. I think Brexit may well be an impetus on the part of the Government of Jersey to have another look at the basic principles of contract law, which may include things in its modern form to do with consumer protection as well.

Could I go back to Lord Jay’s question and just finish on that? One of your questions was about variable geometry and whether that set any useful precedent. On balance, I think the answer is no, because the UK and the Crown Dependencies will not be in the EU, so it is not of direct relevance. If you are looking for political inspiration, there are examples where relatively small territories such as the Faroe Islands have entered into bilateral agreements with the EU. It is not impossible to imagine a political situation where Alderney may be allowed to have free trade in lobsters and crabs.

Lord Jay of Ewelme: Denmark is a member of the European Union.

Professor Le Sueur: Yes, that is why I am saying that it is not a direct parallel, but there are examples of bilateral agreements.

Q18 Baroness Prashar: Moving from movement of goods to movement people, as you know the UK wants to restrict the movement of people from the EU. What effect do you think that will have on the Crown Dependencies’ ability to meet the domestic immigration needs to increase their working age population?

Professor Bates: I can speak for the Isle of Man. It will have an effect because, as our Chief Minister mentioned when he was giving oral evidence, we have very low unemployment rates of about 1.2%. I am not sure that he mentioned this but we also now have a death rate that exceeds the birth rate. That is the trend. It would be particularly difficult for the health service in the Isle of Man, which is an independent health service, and possibly for recruiting in financial services as well. There is an extent to which it could be ameliorated, because we have a Manx work permit regime that is rather different from the Channel Islands; that could be revised a little to encourage immigration. However, I have to say that it would be quite a sensitive issue in domestic Manx politics to broaden the ability of people coming freely to work in the Isle of Man. Their work permit system, a bit like the UK, requires you to be filling a job for which there is no available local person. It will have an effect.

The Chairman: Put simply, just to clarify, my understanding—but I may be wrong—is that the population density in the Isle of Man, which is a different issue from the age distribution, means that there are fewer people relative to the acres or hectares size of the Isle of Man compared with the Channel Islands. As a rule of thumb, that is broadly the case, is it not?

Professor Bates: Yes, you are quite right. Something I did not realise until I got to the Isle of Man is that the Isle of Man is, for example, six times larger than Jersey and has a smaller population. There is plenty of space. It is not all space that you would develop agriculturally or actually build a house on but there is more space.

Baroness Prashar: Did you wish to add anything, Mr Sutton?

Alastair Sutton: I was just reflecting on the common travel area and the compatibility of the common travel area on the one hand with the legislative, executive and judicial autonomy of the islands on the other. Linked to that, if there is a greater entrustment for the islands to conduct their own international relations, and if that were to lead to a bilateral agreement with the European Union in due course, of course it would be possible for the islands to negotiate their own arrangements on the free movement of persons, but probably not, of course, if the common travel area with the United Kingdom existed. I am reminded a little of the debate between Scottish politicians and Whitehall and Westminster on how the border would be policed. In legal theory, a solution would be possible. When I think of Jersey, for example, I think I am right in saying that there are something like 6,000 Polish workers on the island at the moment and 6,000 Portuguese workers who fulfil very valuable roles in the economy, so I think there would be an issue.

Professor Le Sueur: Migration is very important in different ways to the Channel Islands. The problem in Alderney is a rapidly declining population, and policy measures are needed to rectify that. The position in Jersey is very different: it is one of the most densely populated places in the world and the population is rising rapidly. In 2015 the net inward migration was 1,500 people. In a population of just over 100,000, that is a significant number. It is important to recognise, however, that the vast majority of those people were British people moving from the UK to the island. The next largest populations are people born in Portugal, which make up 7% of the island’s population, and people born in Poland, which make up 3%, so quantitatively much less important although, sector by sector, it is of huge importance in relation to the hospitality and agricultural sector. The Polish and Portuguese communities make a huge contribution but I am not sure the problem is any different to Lincolnshire or Norfolk where there will be similar requirements for inward migration.

Q19 Baroness Verma: Following on from that, even though they are smaller in numbers, they will still have uncertain futures, and it is just about seeing where the Crown Dependencies place their emphasis with regard to people whose futures are uncertain—and those vacancies need to be filled—and how the Crown Dependencies are going to respond to that. In the short term, as well as the medium and long term, they will have issues filling those places if it goes by what mainland Britain will say, and that is that there will be no movement of people.

Professor Le Sueur: I am sure that is right, but I am not sure in policy terms whether that is any different to the concerns of farmers in Lincolnshire, for example. Sector by sector, the policy drivers in the Channel Islands may not be so different from those of the UK as a whole.

Baroness Falkner of Margravine: When you speak about the common travel area, this is EU citizens being able to work in the jurisdictions.

Alastair Sutton: No, it is the UK common area.

Baroness Falkner of Margravine: Sorry. If you want greater entrustment and external relations and you hope to have rights of access for EU citizens, is that correct? Is that what it would entail?

Alastair Sutton: I say again that I am not advocating this on behalf of the Channel Islands. I am talking about a legal possibility.

Baroness Falkner of Margravine: The legal possibility, if it were to happen, would exclude of course United Kingdom citizens. That was all I wanted to clarify.

Alastair Sutton: If that situation arose between the Channel Islands acting individually or together and, for example, the EU, the issue of discrimination or non-discrimination would certainly arise as it does in Article 4 of the protocol today.

May I add a general comment about the options facing the Crown Dependencies at the moment? Broadly speaking, if you take the evidence given by their Chief Ministers here, they prefer the status quo. Now, one could express some surprise about that because they are financial services jurisdictions: why would you not want to obtain greater legal certainty for your financial services industry through some kind of bilateral agreement? They prefer to stand aside, so to speak, and, if I may say, to take their chances with that status rather than a bilateral status.

There are two comments to make about that. It is a little bit of a gamble as to how things develop, in a sense. I said earlier that the EU’s policies towards its neighbouring countries—and you see this with the accession state—is to say, “You accept the acquis communautaire, the whole acquis and nothing but the acquis. We are not interested in derogations and so on”. Clearly, if the Crown Dependencies were to be entrusted by the United Kingdom to negotiate a bilateral agreement with the EU on financial services, they would be faced with a demand by the EU to do what San Marino, Andorra and Liechtenstein have done, which is to accept the whole of the acquis, which they certainly would not want to do.

However, here is the gamble. If we are living in a world, under the G20 and the OECD and the IMF, where regulatory and fiscal arbitrage is gradually being eliminated, the historic advantages over the last 30 years of jurisdictions such as Jersey, Guernsey and the Isle of Man to attract investment by virtue of advantageous taxes or different types of regulation are probably going to diminish anyway. We are at a very difficult juncture for small, fragile, vulnerable jurisdictions, and this raises issues about how they relate to the United Kingdom, how they relate to the EU and how they relate internationally. Sorry to raise more questions than answer, but we are at that stage. It is a tipping point for this country as well as for the Territories with which it is associated.

Professor Bates: I just have a couple of points. As far as the common travel area is concerned, from the Isle of Man perspective—and I suspect the Channel Islands as well—they would not want to negotiate something that deprived them of the ability to go to the United Kingdom, which is an historic thing for them to do. I do not think the United Kingdom Government are going to let the Crown Dependencies loose to negotiate their own financial services agreement. I cannot see that happening, to be honest. I cannot see the EU being interested in doing it anyway, so it is basically a non-starter, to be honest.

Professor Le Sueur: Alastair Sutton uses the expression “gambling”, which is an interesting word to use. The stability of the islands, in terms of their position as international finance centres, is really built on changing as little as possible and maintaining the status quo. They have built up their industries on the basis of being third countries so far as financial services are concerned, and I think that as little change as possible is clearly the preferred way. I can understand the political reasons for that.

The Chairman: Thank you. We need to move on from this area in a moment. Can I just be clear in my own mind that you agree that there is a distinction, both in concept and in practice, between the freedom of movement in the sense of people’s ability to move around without their opportunity being frustrated or questioned—and we have seen recent events where that has not happened in some places in the world—which is different from the freedom of either establishing business or indeed being employed? I think I am right in saying already, certainly in relation to the Isle of Man, that there is a different structure for a work permit system from anything that applies in the UK. That is an important distinction for us to bear in mind in bringing this together, is it not? Thank you.

Q20 Baroness Wilcox: Good afternoon. We understand that the Governments of the Crown Dependencies are considering their own versions of the great repeal Bill, and in fact it was referred to just a little while ago. What is your understanding of the extent of domestic Crown Dependency legislation that stands to be affected by Brexit?

Professor Le Sueur: If I was approaching this, I would say that there are probably four categories of law that need to be looked at. First of all, there are the constitutionally significant pieces of legislation that plug the island into the EU within the ambit of Protocol 3. In Jersey, that is the European Union (Jersey) Law 1973, which is a piece of law of constitutional importance.

Secondly, you need to look at the legislation in force to work out how much of that is possibly affected by Brexit. As a piece of legal research this morning, I looked at the legislation database run by the Jersey Legal Information Board and found that there are 107 different enactments in Jersey—that is primary and secondary law—that use the words “European Union”. I did a similar piece of research in relation to the Guernsey Legal Resources database and found that there were 105 different enactments. My guess, without having drilled down into very many of them, is that most of that is legislation that is bringing EU directives into island law that are necessary for the purposes of Protocol 3 and of matters to do with goods, essentially.

Thirdly, and more complicated, are regulations that have direct applicability in the island. Just as in the UK, there are some concerns about black holes appearing if those regulations are not incorporated into island law at the point of Brexit. The islands will have to do some work in identifying where those holes are.

The fourth category of legislation, which is quite difficult to identify, is where the law makes no express reference to the EU but has been inspired by the EU and is adopting very similar standards to the EU or very similar standards to the UK on a regulatory matter where the UK has been influenced by the EU for the purposes of creating some sort of equivalence. Identifying those will require a considerable amount of research.

That is the map, as I would see it, of the piece of work that needs to be done within each of the islands.

Professor Bates: Andrew’s analysis is very valuable. I would start from the position that the UK great repeal Bill will not in fact be that great, just because of the timeframe in which it will have to be done. I suspect that there will be provision for allowing EU regulations to be continued as domestic law and that the directives that have been transposed into domestic law will continue until people think about it and decide what they are going to get rid of.

The only exception to that, really, is that there will no doubt be provisions that are directly inconsistent with the Brexit agreement; they will have to be tidied up. It is a much narrower focus than the domestic press suggests it will be.

The same will apply to the Crown Dependencies. Andrew identified the various categories and I would entirely agree with that. There are another two subcategories. One is that there is a certain amount of legislation in the Isle of Man, and I guess in the Channel Islands, which is taken from a UK template but where the UK template was in fact transposing EU directives such that we are doing it at one removed. A good example would be company law in the Isle of Man that largely followed UK company law, which itself was transposing company law directives. I suspect that the same will happen to that. We have to wait and see what they are going to do and what would be advantageous to change and so forth.

The other subcategory that we touched on is the initiatives on equivalence that are not required by Protocol 3 but which, for a variety of political reasons, are thought to be beneficial. Again, I suspect that you would not want to upset any arrangement by tinkering about with that too much before you gave it a lot of thought. My short answer is that the great repeal Bill will not be that great in its immediate impact.

Alastair Sutton: I agree with the analysis that Andrew gave. It is quite simple really: it is the same for the Channel Islands and the Isle of Man as it is for the United Kingdom. If we and they want continued access to EU markets, experience shows that you have to pretty much align your legislation on what is in force in the EU. If it is trade in goods under Protocol 3, the legislation that is now in force that allows free trade in goods with the Isle of Man and the Channel Islands will have to stay. If financial services is where we want access, we will have to replicate, for example, the AIFMD directive or the insurance directive. I do not see a great deal of scope for widespread repeals of legislation if the aim is to preserve access.

The Chairman: Just picking up on that point, there will also be a need to accommodate future developments or changes in EU law because otherwise we would be out of line.

Alastair Sutton: Absolutely.

Q21 Baroness Suttie: In spite of what you just said, you have said today and at previous hearings that you would like to see as little change as possible, or that that would be the desired outcome.

Professor Bates: No, I am predicting what the change will be.

Baroness Suttie: Yes. Would that be as little change as possible in the relationship with the United Kingdom or as little change as possible vis‑à‑vis the relationship with the European Union? At a certain point these might become contradictory, despite what you have just said about the great repeal Bill not being very great.

Professor Bates: If we take equivalence, which we have been jogging around for a bit—and I think you may have actually raised this in your previous taking of oral evidence—there could be a situation where the Crown Dependencies would have to choose between equivalence with the UK and equivalence with the EU. That would require a bit of political as well as legal sophistication—probably more political than legal sophistication. Once you have decided what you are going to do, it is fairly easy to achieve the equivalence. That would be a worry.

Alastair Sutton: I would like to make clear that I would not presume to suggest to the islands what their policy should be but rather just to point out the options. I have stressed that I think there is some difficulty for the UK in representing internationally a wide range of jurisdictions with differing regulations. Baroness Falkner said that the Treasury accomplishes that quite well and I broadly agree with that, but there have been occasions internationally where the British Government have criticised their own Territories and Dependencies, whether that be in the OECD or in the EU Council of Ministers and ECOFIN.

There are basically three ways forward for the islands. Status quo carries some risks. That is clear. If the perception of the European Union 27 is not that these are Territories that trade agricultural or fisheries products, like the Faroe Islands, but are actually international financial centres, then, as somebody said earlier on, it is perhaps better to have them inside the fold in some shape or form, whether that is by equivalence, bilateral agreements or whatever.

There are a number of different ways forward. One is greater independence from the UK and another is with a bilateral agreement with the EU. It is for the islands to make up their own minds as to what their future would be.

I have some hesitations about just maintaining the status quo, because constructive engagement and close co‑operation implies, ideally, some form of framework agreement, so that at least there is an obligation on the EU side of prior consultation before negative action is taken. It is a step towards greater legal certainty, and what foreign investors and businesspeople want in any jurisdiction is legal certainty. That is the problem with Brexit as a whole for this country, but it is an aggravated problem for a smaller and more fragile jurisdiction. I advocate, at the end of the day, closer constructive engagement with the EU, with the UK and with international fora, possibly accompanied by some form of bilateral agreement.

Professor Bates: It reminds me that the Isle of Man particularly, and the Channel Islands, are always seeking to diversify their economies, for obvious reasons. The Chief Minister gave some examples when he was speaking to you but one that he did not mention is e-gaming. E-gaming, rather surprisingly, represents about 8% of the GDP of the Isle of Man. Now, as you all are aware, the EU is beginning to take serious steps towards regulating e-gaming. If we visit a situation where e-gaming is not part of any Brexit agreement, you then have quite a difficult situation for the Isle of Man. If you proceed with that, and if you look at the EU and at Malta, they have a huge amount of e-gaming.

The Chairman: Indeed, Gibraltar does as well.

Professor Bates: Indeed. However, Malta will still be a member state and therefore it will be in a position to ensure that it gets the best cut of the regulation as opposed to Gibraltar and the Isle of Man, which are outside. There will be difficult situations like that too.

Professor Le Sueur: In direct answer to your question of what the islands want to see changed, whether it is the EU or relations with the UK, the Chief Ministers are clear that they would prefer to change as little as possible in relation to the EU and we will have to see what the outcome of the negotiations are.

In relation to the islands’ relationship with the UK, everybody accepts that that is a changing relationship. Ten years ago, each of the three Crown Dependencies entered into a framework on developing international identity, which was a big step forward and recognised the process of change. The two operate independently of each other, so as little change as possible with the EU, with some change highly likely in an evolutionary approach with the UK.

Q22 Earl of Kinnoull: The word “equivalence” has been bubbling up a bit so many of my questions are about that area. The Chief Minister, in a wonderfully colourful way, described equivalence as a “technical process with a political overlay”. First, I wonder if you agree with that as a good and snappy way of thinking about it.

Secondly, post Brexit and with the political mood as it is likely to be in Europe, I wondered whether you thought that that would negatively affect the Crown Dependencies’ ability to get equivalence in areas that they thought they should get it in—in particular, I suppose, data protection and fund management spring to mind.

Finally, on equivalence, I wondered whether in your experience you felt it was going to be a very big point in that there are enough European Union customers in the EU 27 for it to be a really big thing.

Professor Bates: The Chief Minister of Jersey’s comment was a very astute one and was well put. As far as the alternative investment fund managers directive is concerned, which I will now refer to as the 2011 directive, my understanding of that was that to extend it to the Crown Dependencies and non-EU jurisdictions required ESMA to give an opinion. Last July they gave an opinion, saying that there was no problem with Guernsey or Jersey but they did not extend that to the Isle of Man because there was insufficient information available to them. Since then, post the prospect of Brexit, the Commission has put all those initiatives on hold for all three Crown Dependencies.

What happens next is a bit of a problem, and it might be more of a problem because you have this regime of passports and there is a feeling that it is going to replace equivalence. It is obviously easier and there are suggestions in the Commission that they will do that.

If that progressed, it would make life even more difficult for Crown Dependencies, but it might not.

Alastair Sutton: I would basically agree with the statement by the Chief Minister. As I said earlier on, equivalence is a highly technical matter, but there is the political overlay that we do not know what the attitude of the EU 27 will be to self-governing, autonomous jurisdictions with which there is a history or a track record of relations but which are in fact constitutionally related to the UK. This is the big unknown.

I go back to what I said earlier about mutual interest. The case of Bermuda is particularly interesting. Bermuda is one of the world’s leading centres of reinsurance and I shall never forget when the French Government—it was the Finance Minister, Moscovici, who is now the Commissioner in Brussels—blacklisted Bermuda. He came under pressure from the French insurance industry to take them off the blacklist. Why? Because Bermuda is a partner of the European insurance industry. They reinsure an enormous amount of risk from European countries, so it is a mutual interest and therefore the Bermuda Monetary Authority had to do a great deal of technical work with the European Commission in order to establish equivalence both for supervisory purposes and equivalence with the Solvency II regime. They did that and therefore there is now a good working framework, as it were, for co-operation between the insurance industry of Europe and the reinsurance industry of Bermuda.

Similar considerations apply in fund management to a certain extent. It is a question of confidence, a question of trust and a question of interest. I do not know the answer today to the question of whether the EU 27 see it as in their interest to have a unilateral equivalence decision under the AIFMD for Jersey and Guernsey. I do not know the answer to that. As St John Bates said, we know that the EU Commission in particular has put all these processes on ice for the time being. Obviously there is a process of reflection going on, which is why I say, by the way, that there is this political uncertainty.

Earl of Kinnoull: For the record, I was chief executive of a class 1 reinsurer at exactly the time this discussion was going on, and it was then felt that roughly one-third of the European Union excessive loss reinsurance placements were placed in Bermuda. I would therefore agree with everything you said there.

Baroness Brown of Cambridge: Can I ask a very quick question? Are there any other equivalents to the situation with the reinsurance industry in Bermuda that would come up? Are there other reasons as important as that one that would mean Europe would have to put together something to work with some of these countries?

Alastair Sutton: Economic interest for the EU in insurance and reinsurance is very clear. In terms of asset management, the flow of funds from Jersey, Guernsey and the Isle of Man tends to be through the City of London. People speak of the important co-operative relationship between the islands and some of the Overseas Territories and the City. Of course, if the City is outside of the EU, the question arises as to what the effect will be. I am not an economist but my advice would be to broaden and diversify your markets and certainly to explore the possibility of assets flowing into mainland Europe, which they do already, but to a greater extent and to other markets in the Middle East or Asia, and I am sure that the islands are doing that.

The mutuality of the interest in asset management is not as clear as it is in insurance. There are other areas. Jersey and Guernsey, for example, have equivalence on aviation security. That is very important. If planes want to fly from Jersey and Guernsey into France, Germany or Zurich—not Zurich, although they are probably in the common travel area for civil aviation purposes—data protection is important. If you are going to co‑operate on financial services and you cannot exchange data because people do not trust your data protection rules, that would be a serious disadvantage. There are areas like that that are important.

Q23 Lord Selkirk of Douglas: Do you think that Brexit will leave the Crown Dependencies, as well as the British Overseas Territories, much more vulnerable to EU economic sanctions, subject to other possible measures, when the UK is no longer in such a strong position to influence the European tax policies? The obvious follow-on question is: how best should this be dealt with if an undesirable scenario arises?

Alastair Sutton: Building on my several answers to Baroness Falkner, I hope I have redeemed myself for criticising the British Treasury, which was never my intention. If we deal with the EU first, it is clear that in areas of taxation the member states have a veto power. A single member state can veto any legislative proposal in tax. There are two issues now for the UK in this area. One is that we are now in Brexit mode, and the question is: to what extent will we be able to effectively exercise that veto? The second point is that the veto applies in legislative matters.

A lot of EU tax policy is what I would call soft law, and I will give you an example of that, which is something that you need to watch very carefully for the Crown Dependencies and the Overseas Territories. If my memory serves, it is Section 2 of the common external strategy on tax matters approved by the Council of Ministers that talks about fair taxation and talks about tax systems that facilitate offshore structures. That has been approved by all member states. What has not been approved by all member states is the linkage between that facilitation of offshore tax structures on the one hand and no, low or zero tax on the other. Six member states opposed using no, low or zero as a criterion for blacklisting, but it is an interpretive criterion so it is still in there.

The United Kingdom has certainly fought very hard—in its own interest, by the way, as well as in the interests of the Overseas Territories—to keep out anything on tax rates, but it has failed to do so. The member states are now ploughing on and we are now into the process of screening and dialogue between Jersey and the EU, Bermuda and the EU, and Cayman and the EU. We will see what comes out of that dialogue. By the end of this year, ECOFIN has to decide, first, which third countries to blacklist and, secondly, what sanctions to apply. The working group is still discussing sanctions. It might be the application of a withholding tax and so on.

If the United Kingdom is not there to fight our corner in ECOFIN, of course it will be more difficult. We do not have a seat at the table. We can have bilateral meetings about which there have been many. We can have a consultation. The EU has now agreed to consult and to talk before it shoots, so to speak, but we do not have a voice and we will not have a voice at the table. Clearly, we will be more vulnerable. What is the answer? The answer is difficult even if you are a sovereign state. Ask Liechtenstein and ask Switzerland, which came under massive pressure from the United States to get rid of bank secrecy. It is difficult enough if you are a sovereign state.

I remember my old professor at University College speaking about the power of politics and I must say that I exercised some power of politics when I was a negotiator for the Commission back in the 1970s and 1980s. I know what it is like. With 27 states leaning on you, it is very difficult. There is a rift between us and the EU and the United States at the moment in the OECD and in the G20 on how to deal with regulations and supervision. I am afraid that, for the Crown Dependencies and the Overseas Territories, life after Brexit will be more difficult without the UK having a seat at the EU table and being able to shape and drive EU policy.

Professor Bates: I have a very brief comment on Overseas Territories, which is nothing to really add to what Alastair said but just in case it gets lost before we leave. The Overseas Territories are, in some ways, a much greater task than for the Crown Dependencies in the sense that the relationship between the Overseas Territories and the EU is one of a treaty relationship. That treaty relationship provides specified funding into the Overseas Territories. What makes it more difficult in relation to Brexit is that it is not just the British Overseas Territories that are beneficiaries and parties to this treaties; it is the French and so on and so forth. If you are looking for a Brexit agreement for the Overseas Territories, there is that added dimension: you have to get the other member states on side.

The Chairman: They have to divvy up the funds between them.

Professor Bates: Yes, and then you have to deal with the screams from the Overseas Territories, and other states are not going to get so much if you give in.

Q24 Lord Selkirk of Douglas: It seems that the future situation that you are describing is a sensitive one. Will you be keeping a very close dialogue going with the Ministers in the British Government so that they know exactly what is going on, and if something not particularly satisfactory is likely to arise they can work out the best approach in the circumstances?

Professor Bates: It is not for me to ensure there is a dialogue; it is for the Chief Ministers and the Administrations, obviously. There are two things that I would just reiterate. It is fine to have these negotiating channels. They work very smoothly when there is no serious action going on, but they have a tendency to unravel when things get busy. That is my main point.

The other point is that when you look at this in institutional terms and you discover that the Crown Dependencies do not have direct access to the Ministerial Committee (EU negotiations), unlike the devolved Administrations—they do not seem very happy about it, but they do have direct access—you have to ask yourself: where is the trust to do something here? If the Crown Dependencies are full members of the British-Irish Intergovernmental Council, what is different, in effect, from that to the EU negotiations? I suppose that if you are being pejorative you would say that the difference is that the UK Government cannot be bothered with small jurisdictions when they are trying to negotiate something major. They obviously would not agree with that, but there seems to be a curious difference between the British‑Irish Intergovernmental Council and this Joint Ministerial Committee. If I was sitting as the Chief Minister of a Crown Dependency, despite all the assurances and despite all the networking, I would find that slightly worrying, because that would be your opportunity to say “Look, if you do that, this is going to affect us seriously”. You can be at the table and make the point.

The Chairman: I was going to ask Andrew if he wants to comment in a moment, but perhaps I could add something for him to think about in relation to the question of any future relationship post Brexit with the European Union, which will presumably be crafted at some stage in terms of HMG and the United Kingdom, and whether there might be a continuing interest by the Crown Dependencies in participating in that, because that in a sense would have some analogy with the British-Irish machinery.

Professor Le Sueur: I would associate myself with the analysis of my two colleagues. If there is going to be a point of problem in the future, which may be a catalyst to constitutional change, it is quite likely to be something to do with tax, given the importance of financial services in the islands. I agree that life after Brexit is almost certainly going to be more difficult and that the islands are going to be in a more vulnerable position than they are now.

Alastair Sutton: It is very important to be crystal-clear on one thing about taxation. Classically, in European and international law, states are fiscally sovereign to set their own tax structures and rates in direct taxation, because of course indirect taxation has been harmonised for a long time.

There are now two schools of thought in international tax theory, if I can put it that way. The one that is espoused by the European Union, under the Commission of Mr Juncker and Mr Moscovici, is that tax rates, tax structures and financial regulation should not be used as an instrument of national economic competitiveness. The United Kingdom has always taken the opposite view. Ireland has always taken the opposite view. There are other states like Estonia, Malta and Cyprus that probably take the same view. That is why it is 22 states against six in the Council at the moment. That is what independent jurisdictions outside the EU are up against. Classically, historically, there is no doubt that the Crown Dependencies and the Overseas Territories have used a combination of attractive tax rates, attractive structures and attractive regulatory systems to attract business. That is fine. However, since the crash of 2007 and 2008, the world has changed and now there is a drive towards greater co‑ordination. It will be quite difficult to continue to do business on the old model.

The Chairman: Time is beginning to tick on. This has been very illuminating and helpful to us. I would like to get everyone—both the questioners and the respondents, if I may—to respond fairly briefly to three outstanding points that we have. Listing them in order, it will be convenient to do it this way: Lord Whitty and then Baroness Falkner if there is anything else on financially-related issues; and then Lord Trees on a slightly different matter. Let us go in that order and you can respond in the spirit of what we have said.

Q25 Lord Whitty: This relates to the economics rather than the regulatory tax and sanctions structure. The Chief Ministers have emphasised to us that, whatever the international dimension, their main market is actually the UK, including in financial services. In relation to Brexit, some economists are warning that the City of London will be a sufferer from Brexit. There are other economists who will take a different view, but either way does the financial services in the Channel Islands and the Isle of Man rise and fall with the success or otherwise of the City of London and the financial services based here, or is there an entirely different dimension to the prosperity or otherwise of their services? In other words, are you so tied up with the UK’s financial services that the regulation and taxation provisions are only marginal, or is there a dramatic difference between your prosperity and that of the City of London?

Professor Bates: It is quite a complex situation. Our Chief Minister, Mr Quayle, said that our main business was with the UK. He also said that we are slightly different from the Channel Islands. Our financial business is international and we are not tied so much with the City of London. You might have to ask him exactly how to resolve that. I cannot help you on that.

What I can say is that it is almost inevitable that there will be significant areas of financial services affected in the Crown Dependencies if there is a downturn in the City of London. It will be exacerbated should there be a significant move of institutions or parts of institutions elsewhere in the EU for obvious reasons. I was talking to a German colleague who sells and leases commercial property in Frankfurt a few days ago, and my only comment is that he seemed to be a very happy man.

Q26 Baroness Falkner of Margravine: Mr Sutton, I doubt that the Treasury would recognise that description of me as the defender of the Treasury. I was just trying to flesh out whether there was a divergence of interest now between your jurisdiction and the United Kingdom.

We have fairly exhausted your views in that you have been quite clear that you think the status quo ante would have been the best way forward. I have talked to other jurisdictions that are potentially affected by the problems that one has with equivalence—it being a technical issue with the Commission taking its time, and they have now put it on ice and, in other cases, changed their mind halfway through and so on. I have had conversations with other jurisdictions. I can name two: one is the United States and another is Switzerland, but I know there are others.

Would you contemplate, in recognising that you are quite specialised, a different kind of body, which is one of the things that the United Kingdom might be pushing for along with those jurisdictions, i.e. a separate body that does the technical assessment on equivalence as we go forward, not based in the Commission but outside the Commission—in other words, a body that these bodies have more trust in being the place where equivalence decisions are taken. The current problem is that, depending on the political climate, people are asking for more and more information and going forth with new laws and so on. Would that be of interest to you to depoliticise the equivalence regime?

Alastair Sutton: In a way, has that not already happened with the creation of the European supervisory authorities? Initially I remember my old friend, David Wright, when he was director-general of FISMA, saying, “These people will do what we instruct them to do. We will give them mandates”, and so on. What I gather about the European Banking Authority, the insurance authority in Frankfurt and ESMA in Paris is that they are actually acting as autonomous independent regulators in a way. They are depoliticised. They work with the supervisory authority of Bermuda, Switzerland or Japan.

Baroness Falkner of Margravine: You do not think the system can be improved. You think it is working.

Alastair Sutton: Yes. It has got to a good point.

Q27 Lord Trees: Good afternoon, gentlemen. My question is about the ability to make free trade agreements, and it arises from a written submission and a suggestion, and it concerns the Isle of Man, so it might be of particular interest to Professor Bates. The suggestion was that the UK is not yet in a position to negotiate free trade agreements with third parties until it leaves the EU but that that constraint does not apply to the Isle of Man. Thus, the Isle of Man could be in a position, were the UK Government to be complicit, to begin negotiating free trade agreements, for example, with the Commonwealth, such that there could be an FTA oven-ready, if you like, on Brexit day 1, to the advantage of the UK. Now, this is way outside my area of expertise, but I thought that this was an intriguing idea. Is it a complete non-starter? Is it purely self‑interest? Is it the sort of innovative thinking outside the box that we will need to survive in the brave new world post Brexit?

Professor Bates: Thank you for asking me that question, Lord Trees.

The Chairman: You have cheered the Committee up, Lord Trees.

Professor Bates: It is somewhat outside my area of expertise as well, but my initial reaction is that if the Crown Dependencies are governed by Protocol 3, there would be sensitivity in London—and a lot of sensitivity in Brussels—if they started negotiating free trade agreements themselves prior to the Brexit process finishing. I cannot give you any legal chapter and verse for that, but that is my political feeling of the reaction and it would come to bear fairly heavily on the Isle of Man.

If I could just make one other observation, which is post Brexit and which is going a little bit away from what you were saying, what we are envisaging in the new world is that there will be a wonderful free trade agreement with magic qualities between the United Kingdom and the European Union, and that there will be a great burst of frantic government activity to have free trade agreements all over the world.

I am obviously exaggerating a little, but one of the things that would concern me in relation to the Crown Dependencies is that second stage. There are lots of countries that are in the frame for free trade agreements with the UK post Brexit. My worry would be that as the plethora of those negotiations start, it will be quite difficult for the Crown Dependencies to keep track of what is going on and they will be stretched to put their position. We all recognise that New Zealand seems to be heading the race to get there. From the perspective of the Isle of Man, if there is a free trade agreement between the UK and New Zealand, what impact will that have on the Manx lamb industry? Do they want to be in this or not and what is the balance in that? Just keeping track of all those trade agreements will be a major task for the Administrations of the Crown Dependencies.

The Chairman: Without spending a sum, there will also be some concerns, as it were, bilaterally. If you have, say, a sheep-producing industry, there would be a potential clash of interest. I am keeping an eye on the monitor as well, because I think we may get rudely interrupted by the Division. Do either of you have any other thoughts?

Alastair Sutton: I thought Lord Trees’ question was a very good question for Andrew’s law students about the scope of community competence and whether it extends to the Crown Dependencies. Technically what St John Bates said is right. Being in the customs union, even the Isle of Man or Jersey does not have the right to negotiate free trade agreements until we leave. However, the more important and longer-term question goes back to what we have been discussing, which has been a theme or a leitmotif of our discussion this afternoon, which is how independent the Crown Dependencies, jointly or severally, want to be in the future.

In other words, when the UK negotiates with the United States, New Zealand, Australia and other markets, especially in financial services, do the Crown Dependencies and the Overseas Territories want to piggy-back on the UK or do they want to do their own thing? If they want to do their own thing, do they do it on entrustment or do they ask the Foreign Office, very kindly, to find some time to go in and negotiate a separate agreement? I do not see that as being very easy.

There was one thing that we did not mention at the very beginning, although St John Bates briefly referred to it. Of course, the Overseas Territories have that much broader treaty link with the EU than is the case with the Crown Dependencies. They are under Part 4 of the Treaty on the Functioning of the European Union. That is not so relevant for Bermuda, BVI and Cayman, whose GDP is higher than the EU average, but the other 12 or 13 Overseas Territories that are more remote, poorer and receive development aid from the EU and preferential trade arrangements from the EU will lose that on the day of Brexit. The issue is for the UK to replace that, I presume, hopefully not with another airport in St Helena but with other aid and with other preferential trade arrangements.

Professor Le Sueur: I do not have a short answer, so perhaps I could write to the Committee with a response.

The Chairman: That would be very helpful. Let us do that. Before I do the grace note, which I would very much wish to do on this occasion, I just wondered if any of you had any quick additional comments. The particular one that we would like to pick up on is anything on the Brexit consultation machinery. You indicated right at the beginning that it might not be ideal, but is it the best that we are going to get? More generally anyway, is there anything that you would wish us to know this afternoon?

Professor Le Sueur: I would just like to reiterate my opening remarks about not forgetting the islands of Alderney and Sark and how they are incorporated into the machinery.

Professor Bates: I have made my answers to the sort of questions you are asking fairly clear already, so I do not have anything to say.

Alastair Sutton: My last comment would simply be that the position of the United Kingdom in leaving is not what it was in joining. The leverage of the UK in negotiating for the Crown Dependencies and Overseas Territories is less than it would be. Therefore it behoves them to take matters into their own hands as much as they reasonably can, and to enlist the help of the UK as much as they reasonably can.

The Chairman: Thank you very much, gentlemen. Please remember that we will be in touch with the transcript, and please feel free to correct any factual errors in there. To borrow the language of trade negotiations, I hope that you will also feel that this is a living relationship. If you have any further thoughts such as the one that Andrew has volunteered to us, we would be delighted to receive them.

There was an interesting point that Mr Sutton raised about the position of Hong Kong in international negotiations. We do not need an essay, but if you have a short note that could just explain the differences in practice, it would be helpful.

Andrew Le Sueur had some very interesting statistics on the interaction with Jersey and Guernsey domestic law in respect of the obligations under Protocol 3 in the context of the great repeal Bill and it would be quite useful to get that iterated somewhere so that we could think about it.

But please, as I said, feel free to come back to us. All I would say on behalf of all the Committee, I am sure, is that, if I may put it this way, you have navigated very carefully the fascinating interaction between the political, on the one hand, and the economic and financial, on the other hand, as well as, if I may say, the distinction between the formal channels and indeed the treaty obligations and privileges as against the informal understandings that will also influence the situation in which the countries find themselves. As we said to the Chief Ministers, though, we are anxious that these matters are attended to and understood in Whitehall and that we have a continuing obligation to make sure that they are brought to the public attention here. You have helped us immensely in that. Thank you.