Written evidence from The International Financial Centres Forum

The International Financial Centres Forum (‘the Forum’) is a member-funded, private sector, not-for-profit organisation.  The Forum advocates responsible cross-border financial intermediation in support of trade and investment as a means of promoting economic growth and enhancing development prospects.  Members of the Forum include professional service firms and businesses based in Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, the Isle of Man and Jersey.[1]

The Forum welcomes the opportunity to respond to the Justice Committee’s inquiry into the implications of Brexit for the Crown Dependencies.   We recognise that the Overseas Territories are outside the scope of this inquiry but note that they have many interests in common with the Crown Dependencies.

1.                   Background and objectives

1.1.             We understand that the formal relationship between the Crown Dependencies and the EU is enshrined in Protocol 3 of the United Kingdom’s 1972 Accession Treaty and is confirmed in what is now Article 355(5)(c) of the Treaty on the Functioning of the European Union.[2]  The Crown Dependencies are part of the EU Customs Union for physical goods but are ‘third countries’ in all other respects, including for financial services.

1.2.             The broad objectives for the Crown Dependencies’ financial services sector in the Brexit negotiation, as we see them, are to:

1.2.1.        maintain a close symbiotic business and political relationship with the United Kingdom and support the UK as it negotiates its EU exit process;

1.2.2.        maintain access to EU markets for financial services based on fairly-judged equivalence standards (ESMA’s determination on AIFMD illustrates some of the risks; see 4.4); and

1.2.3.        limit the risk of politically-motivated EU blacklisting of Crown Dependency financial centres based on opaque, poorly-defined, or discretionary criteria.

2.                   How the Crown Dependencies can help the United Kingdom prosper in a post-Brexit world

2.1.             The Crown Dependencies will not be immune to the effects of uncertainty during the Brexit negotiation process, especially insofar as it affects the City of London, to which the Crown Dependencies’ financial services industry has close links.

2.2.             The goal of the finance industry in the Crown Dependencies is to support the United Kingdom in the Brexit process, contributing to enhance UK trading relationships with countries beyond the EU.  We list a number of practical suggestions on ways in which we think the Crown Dependencies (and Overseas Territories) might be able to help:

2.2.1.        Funding infrastructure – Infrastructure investment is needed to improve labour productivity, essential for keeping business in the United Kingdom and raising workers’ wages.  We note that this is a key priority for the Chancellor.  British territories have facilitated tens of billions of investment in the United Kingdom, including:

(a)               £500bn is invested in the United Kingdom from other countries through Jersey.[3]  Investment in Heathrow,[4] Gatwick,[5] and other airports is conducted through Jersey-based financing subsidiaries;

(b)               Guernsey funds have invested a net £25bn of foreign capital into British infrastructure and private equity, according to KPMG,[6] including the M6 toll road and Aberdeen, Glasgow, and Southampton airports.

(c)                Cheung Kong Infrastructure has invested tens of billions from China through Bermuda into British infrastructure – from UK Power Networks to Northumbria Water to Northern Gas Networks;[7] and

(d)               the Cayman-based Social Property Impact Fund aims to invest £800m in social housing in the United Kingdom.[8]

2.2.2.        Increasing pension returns – Despite automatic enrolment and the triple lock, the United Kingdom’s savings are insufficient to keep up with the needs of an ageing population.  Maximising returns to savings is therefore essential.  The mediation of pension investments through the Crown Dependencies and Overseas Territories’ financial centres makes it easier for British pension-holders to invest in high-growth countries, such as China and India, and reduces risk through international diversification.  British territories are uniquely placed to achieve this, as their regulatory environments are designed to facilitate cross-border pooling of assets, which is why most British pension funds (including those that are tax-exempt) invest through such jurisdictions.

2.2.3.        Reducing the cost of insurance – Lloyd’s of London globalises its businesses through the Crown Dependencies and Overseas Territories, which reduces the premia paid by consumers and businesses.  Bermuda is the world’s largest insurance hub, with thirteen of the world’s forty largest insurers domiciled there, increasing Lloyd’s of London’s insurance capacity by over a third.[9]  British territories also reduce the cost of self-insurance for businesses; Guernsey and Isle of Man are the world’s fourth-largest and seventh-largest domiciles for captive insurers respectively.[10]  Bermuda’s experience in securing access to EU insurance markets through Solvency II equivalence may also be a working model for similar British access to the EU.

2.2.4.        Increasing lending to business – Lending to small businesses is boosted by access to international capital markets through British territories.  Jersey alone provides a net £90bn of funding to British financial institutions to lend.[11]  This is more than half of total bank lending to British small and medium-sized businesses, and three times the estimated funding gap for SMEs.[12]

2.2.5.        Boosting financial services – The British territories are key symbionts contributing to the success of the United Kingdom’s financial services industry, facilitating a tax-neutral platform for fund management in this country.  KPMG has found that Guernsey domiciled investment funds alone earn the United Kingdom at least £1.1bn a year in management fees.[13]  Cayman is home to 60% of the world’s alternative investment funds by value, while the Crown Dependencies are home to a further 8%.[14]  These tax-neutral platforms cannot be replicated by Paris or Frankfurt.

2.2.6.        Creating jobs in the United Kingdom – Hundreds of thousands of jobs in the United Kingdom depend on the British territories.  Capital Economics found last month that up to 250,000 British jobs depend on Jersey alone.[15]  In 2015, economics consultancy Transnational Analytics found that Bermuda companies employ 69,000 people in the United Kingdom.[16]

3.                   Opportunities for the Crown Dependencies

3.1.             The Crown Dependencies have a mutually-beneficial relationship with the European Union as a whole, as well as with the United Kingdom.  Jersey alone provides €188bn of inbound funding to the EU excluding the United Kingdom, supporting 88,000 net jobs.[17]

3.2.             British territories significantly increase the United Kingdom’s influence in the world at this pivotal moment for the country.  Crown Dependencies’ financial services are successful- and trusted- because they are part of the British family, with business environments reliant on British-inspired legal institutions, British-trained professionals, and British courts.  Their financial footprint increases the United Kingdom’s soft power at a time when the country has the need and opportunity to expand to service a more geographically-diverse client base.  This applies especially in Asia, where British legal institutions are widely admired.  China’s biggest source of foreign direct investment is the British Virgin Islands, providing four times as much investment into China over the last five years as the United States,[18] with Cayman and Bermuda each investing more than the United Kingdom.  As a consequence, China has been one of the strongest supporters of the British territories.[19]

3.3.             We understand that the Government will be considering its options for protection of its financial services industry, possibly including ‘equivalence’ regimes that provide Single Market access for some financial services from third countries.  As third countries, the Crown Dependencies currently operate under this model and we would be happy to provide private-sector expertise to assist in a full assessment of this option if this is of interest.

3.4.             The Crown Dependencies, as well as the Overseas Territories, support the EU’s Code of Conduct on Business Taxation, which aims to eradicate harmful tax practices.  The Crown Dependencies are the only independently-administered jurisdictions outside the EU which follow the Code.  Although the Crown Dependencies are committed to eradicating harmful tax practices, expansive interpretation of the criteria has led to pressure on them to implement tax policies that would harm capital flows into the EU without improving tax good governance.  The Channel Islands Brussels Office submission to the consultation conducted by the EU Capital Markets Union illustrates the concerns.[20]

4.                   Risks for the Crown Dependencies

4.1.             The Crown Dependencies provide significant benefit to the United Kingdom and the rest of the EU, including through the provision of capital to fund European infrastructure projects and as portals for non-EU funds to pool for investment into the EU.  EU access to capital pools in the Crown Dependencies is especially important at a time when bank liquidity in Europe is under considerable pressure.

4.2.             Although seldom recognised in Brussels, the long-term interests of the EU likely rest on promoting regulatory congruence on international standards rather than EU Member States establishing a globally uncompetitive (gold-plated) regulatory regime.  This will be preferable for the United Kingdom as well going forward, as the UK would otherwise likely need to meet two sets of standards.  This could render British financial institutions either unable to access EU markets due to EU-perceived under-regulation or uncompetitive in non-EU markets due to client-perceived over-regulation.

4.3.             The EU is currently developing a common blacklist of ‘non-cooperative tax jurisdictions’, the criteria of which were agreed at the 8 November 2016 meeting of ECOFIN.  The Crown Dependencies have robust regulatory regimes and high levels of transparency, as assessed by objective observers, such as the Financial Action Task Force (via the IMF and Council of Europe’s Moneyval) and the OECD; see the Appendix for details.  However, one of the criteria (2.2) is sufficiently vague that it may effectively blacklist jurisdictions for having low or no corporate tax rates, per annex II, para 13.[21]  This would damage the Crown Dependencies despite their high regulatory standards and contribution to the EU.  The vagueness opens the Crown Dependencies up to the risk of the process being politicised.  We see it as important for the EU’s blacklisting criteria to converge with the objective, globally-accepted transparency-based criteria that have been adopted by the OECD and G20.

4.4.             Market access might also be impaired by passporting or equivalence regimes that are opaque or discretionary.  For example, the European Securities & Markets Authority (ESMA) advised the Commission in June 2015 to extend Alternative Investment Fund Manager Directive (AIFMD) passporting rights to Guernsey and Jersey, due to their equivalent regulatory regimes:[22] the first jurisdictions for which ESMA recommended access.  However, the Commission has delayed acting on this advice, with some industry observers attributing this to Brexit and to greater sensitivity to competition from foreign financial centres.  Guarantees of equitable and expedited treatment would increase certainty and thus smooth capital flows.

We note the Prime Minister’s invitation to the Crown Dependencies to consult with the Government throughout the negotiation and exit process.  The private sector in the Crown Dependencies welcomes the opportunity to make a constructive contribution to this process in the interests of financial services offered from the United Kingdom, the Crown Dependencies, and other British financial centres.

We hope that this submission is helpful and would be happy to provide additional written evidence on any of these points or to appear before the committee and provide oral evidence if invited to do so. 

16 November 2016

Appendix – Financial regulatory commitments and ratings

Below are the key ratings for recognised anti-money laundering, transparency, and tax standards for the Crown Dependencies, alongside the United Kingdom and other G7 countries for context, as well as commitment to unilateral regulatory initiatives on beneficial ownership and taxation.

Numeric cells colour-coded (green/yellow/orange/red) by their quartiles in the overall rankings, including jurisdictions not considered here.