Written evidence from Jersey Finance Limited

1               Introduction

1.1          Jersey Finance Limited (JFL or we as appropriate) is run as a not-for-profit organisation, established to promote the Island as an international finance centre of excellence and to represent the interests of Jersey’s financial services industry.

1.2          We welcome the opportunity to provide comments to the Justice Committee and are encouraged that the impact of Brexit on the Crown Dependencies is being considered.

1.3          Accounting for more than 40 per cent of the Island’s GVA, the financial services industry is the largest sector of Jersey’s economy. It directly employs over 13,000 individuals – around 25 per cent of the total workforce - and we estimate that, once the indirect and induced effects of the sector are taken into account, around 50 per cent of the Island’s residents rely on the financial services sector for employment.

1.4          The impact that any major regional or global event has on the finance sector typically has a commensurate impact on the Island’s broader economy. Brexit has the potential to have such an impact and we therefore consider it important that the views of the financial and related professional services industry (FRPS) are provided to the UK Government and considered during the negotiations with the EU on its terms of Brexit.

1.5          We note that the Justice Committee has issued a call for evidence and has identified three key areas for comment: 

           What opportunities and risks does Brexit create for the Crown Dependencies, and from the perspective of the Dependencies what should the UK government prioritise in its negotiations with the EU over its terms of exit?

           How will the constitutional positions of the Crown Dependencies be affected by the UK’s departure from the EU?

           How effectively is the UK government, and particularly, the Ministry of Justice engaging with the Crown Dependencies on Brexit?

1.6          This response document is limited to the considerations of the FRPS industry in Jersey in relation to the above questions.

2               Constitutional position with the UK

2.1          Jersey’s status as a Crown Dependency gives the Island constitutional rights of self-governance and judicial independence. The Island has responsibility for all matters apart from defence and international diplomacy, which remain within the remit of the UK. It is not represented in Parliament and UK law does not ordinarily extend to Jersey. As a Crown Dependency, Jersey is neither part of the UK nor the EU.

2.2          Jersey did not have any say in the referendum and it is our understanding that the Government of Jersey will not have any direct role in the upcoming negotiations. 

2.3          The constitutional relationship of Jersey to the UK exists wholly outside the UK’s membership in the EU. It is our belief therefore that the withdrawal of the UK from the EU should have no effect on the Island’s relationship with the UK.

2.4          JFL considers there are many benefits to maintaining the status quo of the current Jersey-UK relationship because, as discussed below, it results in mutual benefits for both parties. We would have particular concern if the customs or monetary unions were altered, or the free movement of people between Jersey and the UK ceased or became more difficult. 

2.5          In 2016, JFL commissioned Capital Economics to prepare a report on the economic, financial and fiscal linkages between Jersey and the UK entitled Jersey’s Value to Britain. The report identified that:

           Jersey supports an estimated 250,000 British jobs, of which 190,000 come from foreign investment alone;

           the activities and jobs generated in the UK by investment through Jersey produces tax revenues in the region of £5 billion per annum for the British exchequer;

           Jersey had a trade deficit of around £500 million with the UK; and

           Jersey’s professional service firms refer around £230 million of business to their counterparts in the City of London each year.

2.6          The report concluded that while some of this activity would take place even if Jersey did not exist, 85 per cent would not happen without Jersey.

2.7          We consider it important that the symbiotic and mutually beneficial relationship continues and believe the maintenance of the existing relationship to be of fundamental importance.

3               Constitutional position with EU

3.1          The formal relationship between Jersey and the EU is enshrined in Protocol 3 of the UK’s 1972 Accession Treaty (the Protocol) and is now confirmed in Article 355(5)(c) of the Treaty on the Functioning of the EU. The Protocol brings Jersey within the EU Customs Union, permitting the free movement of goods.

3.2          Contrastingly, the FRPS industry is not part of the single market and has developed outside of the EU, although it has built up third party relationships with the EU through means such as equivalency testing.

3.3          In relation to financial services, Jersey was a ‘third country’ prior to the referendum decision and will remain a ‘third country’ once the UK has formally exited the EU. In theory, therefore, Jersey’s relationship with the EU from a financial services perspective should not change.

3.4          As with the Jersey-UK relationship, the Jersey-EU relationship is an important one for the FRPS industry and for both partner jurisdictions. A further report commissioned by JFL entitled Jersey’s Value to Europe details the benefits of Jersey’s current relationship with the EU, identifying that (all figures are excluding the UK):

           12% of the combined value held in Jersey’s banks, funds, trusts and special purpose vehicles has been invested in the EU;

           Jersey’s financial services sector facilitates €188 billion of foreign investment into the EU;

           €200 billion of investment intermediated through Jersey into the EU is helping to support 96,000 jobs in those member states;

           one third of almost €300 billion in funds administered or managed in Jersey are located in markets in the EU; and

           over €500 billion of assets are held in Jersey private trusts, of which 8% has been settled by individuals resident in EU states.

3.5          These figures highlight the importance of maintaining Jersey’s access to the European financial services markets and the mutual benefits that Jersey’s current relationship with the EU can offer.

3.6          As with the Jersey-UK relationship, the maintenance of the status quo with our relationship with the EU would be preferable.

4               Opportunities and risks

Impact of Brexit and market uncertainty

4.1          The decision by the UK to leave the EU will inevitably mean a period of uncertainty as a new relationship with the EU is agreed and new trade agreements are negotiated, both within and outside of the EU. In the short term, such uncertainty could suppress growth and businesses may put large projects temporarily on hold.

4.2          As evidenced above, Jersey’s FRPS industry is inextricably linked with the UK and, as a result of uncertainty caused by Brexit itself and the negotiations, it would not be surprising if Jersey experienced a temporary slow-down in business activities involving the facilitation of investment into the UK.

4.3          The overall impact on Jersey’s FRPS industry may though be sheltered due to the industry’s increasingly international client base. By way of example, Jersey’s Value to Britain concluded that three-quarters of the wealth managed in Jersey originates from ultimate investors who are not domiciled in the UK, with North America, Asia Pacific and the Middle East all being major contributing regions.

4.4          In the longer term, the UK’s infrastructure and expertise mean there is every chance it will remain the world’s leading jurisdiction for financial services. If the UK were to emerge a stronger international competitor, Jersey will stand to benefit as capital flows both into and out of the UK return and potentially grow beyond current levels.

4.5          In relation to the UK’s negotiations with the EU on its terms of future access to European markets, JFL are of the view that any enhanced position the UK government can achieve would be equally beneficial to Jersey. Likewise, Jersey’s current means of access as a third country would be relevant to the UK in negotiating its position. JFL would encourage the UK and Jersey governments to maintain an open dialogue in respect of any perceived enhanced positions.

Development of new markets

4.6          As noted above, Jersey’s FRPS industry has an increasingly global outlook and it is likely that members of our industry are already active in many of the international markets the UK will be looking to deepen relationship with over the coming years. Deeper relationships with the UK can be expected to result in commensurate benefits for Jersey’s finance industry, with the opportunity to act as a conduit for investment into and from the UK.

4.7          A more internationally focussed UK could therefore aid to further grow our own finance industry’s international client base.

Relationship with the EU

4.8          As noted above, Jersey has spent decades developing its relationship with the EU as a ‘third country’ and it is a system which, overall, works well for the Island. It would be our preference that Jersey’s relationship with the EU does not change either formally or, more importantly, informally through, for example, a change to the way the EU provides for third country access generally or indeed a change to the way the EU treats specific third countries.

4.9          An example of the above being a risk is evidenced through the current situation with AIFMD passporting.

4.10      In July 2016, the European Securities and Markets Authority (ESMA) recommended to the European Parliament, Council and Commission that Jersey should be amongst the jurisdictions granted an AIFMD passport. This was an important development for Jersey’s funds industry as a passport will enable Jersey funds to be marketed throughout the EU, whereas access is currently available through National Private Placement Regime (NPPR) agreements reached with individual EU Member States.

4.11      There has been some implementation delay in respect of the EU legislation on the AIFMD passport, with little indication as to when the passport will be forthcoming. A concern is that the Brexit decision has caused this delay, with the EU not wishing to provide for such a significant third country access mechanism (and setting a precedent on the required standard a third country is expected to achieve) before negotiations with the UK are complete. This delay could cause difficulties for Jersey’s FRPS industry if NPPR were to be removed by individual or multiple member states. In this example, as long as NPPR continues, the FRPS industry in Jersey considers it a workable alternative to the passport, but it does appear that the Brexit negotiations are already adding to the complexity of Jersey’s own third country access aspirations.

EU list of ‘non-cooperative jurisdictions’

4.12      The blacklisting of ‘non-cooperative jurisdictions’ by the EU is a concern for Jersey, particularly given the UK’s pending departure from the union.

4.13      Jersey’s high standards of compliance are demonstrated through recognition by various international bodies, most recently MONEYVAL, which scored Jersey as Compliant or Largely Compliant in respect of 48 of the 49 Financial Action Task Force (FATF) Recommendations.

4.14      Additionally, Jersey has consistently been at the forefront of the transparency agenda, with credentials including:

           Automatic Exchange of Information (AEOI) - Signing up to US FATCA, the UK IGA and being an early adopter of the Common Reporting Standard;

           Exchange of Information on Request (EOIR) - Achieved a “Largely Compliant” rating by the Global Forum with respect to the OECD EOIR standard and having signed up to the Multilateral Convention on Mutual Administrative Assistance (MCMAA) in Tax Matters; and

           became a BEPS Associate a member of the BEPS Inclusive Framework in June 2016 and is taking a leading position having already lodged Country-by-Country Reporting regulations.

4.15      Notwithstanding Jersey’s compliance with international standards on regulatory and transparency matters, we are concerned by the approach the EU may take – without the moderating influence of the UK – in respect of low or no corporate tax jurisdictions such as Jersey. We would be particularly concerned if criteria are introduced which are not internationally recognised standards, such as the headline rate of tax.

4.16      Our FRPS industry and, we believe, the Government of Jersey will look to the UK to appropriately represent Jersey in these ongoing discussions while it remains a member of the EU. Representation on these matters after the UK’s exit will need to be considered carefully.

5               Engagement of the UK government with the Crown Dependencies

5.1          As a representative of the FRPS industry, JFL has limited dealings with the UK Government. We do, however, understand that the relevant departments within the Government of Jersey have direct access to their UK counterparts, which is encouraging.

5.2          JFL maintains an open dialogue with the Government of Jersey, enabling any FRPS industry concerns to be raised and shared in-turn with the UK Government.

5.3          JFL was encouraged to see the assurances provided to the Crown Dependencies in the Prime Minister’s letter to the Chief Minister dated 26 July 2016. We would naturally advocate the continued strong lines of communication between the UK and Jersey governments both during the period of Brexit negotiation and also post-Brexit as a greater focus is placed on building new, or further developing, relationships with non-EU jurisdictions.

6               UK Government priorities

6.1          In the UK’s negotiations with the EU over its terms of its exit, we believe the following matters will be of fundamental importance to Jersey’s FRPS industry and will, in turn, have the potential to significantly impact Jersey’s, and by implication the UK’s, wider economy:

Maintaining access to EU markets for financial services

6.2          With the UK’s financial services sector looking at joining Jersey as a third country it is likely that our wishes will be aligned on the matter of ongoing market access.

6.3          The current system of achieving ‘equivalence’ has provided Jersey’s financial services industry with access to European markets and has generally worked well, although it does not have the enduring certainty of a treaty arrangement.

6.4          JFL strongly advocate that the UK seeks to ensure that market access already secured will remain and that access will be provided for in respect of new EU Directives and Regulations through equivalence criteria which assess all third countries against fair and unambiguous standards.

6.5          It is possible that the UK may obtain a new form of market access through its exit negotiations and that, in turn, this could impact Jersey’s FRPS industry. We would encourage active dialogue between the UK and Jersey governments on such developments to ensure the potential impact on Jersey’s FRPS industry can be assessed and considered appropriately.

Maintenance of existing free movement for individuals

6.6          Jersey’s economy, like many others, relies on an international workforce and it is particularly important to the FRPS industry that it continues to be able to attract talent to the Island.

6.7          We would wish to see the Common Travel Area (CTA) continue and for Jersey to remain part of the CTA to ensure that travel between constituent territories does not become overly burdensome.

6.8          With Jersey’s wider economy and FRPS industry having strong EU connections with Portugal, Poland and Ireland (among other countries), we would wish to see existing workers’ rights to reside in Jersey maintained and also the continued ability of our industry to bring in talented workers where required. 

Maintaining the current relationship with the UK

6.9          As outlined above, the current relationship between the UK and Jersey is mutually beneficial. The UK’s exit from the EU provides a real opportunity for the UK and Jersey to grow the existing relationship further, through investment by non-EU based investors.

7               Conclusion

7.1          JFL consider the current relationship of the FRPS industries in the UK and Jersey to be of mutual benefit and post-Brexit, would hope that opportunities to grow the relationship materialise as both jurisdictions increasingly look to international markets.

7.2          Notwithstanding this, the EU will remain an important market for Jersey’s FRPS industry and we would wish to see the mechanism by which Jersey currently obtains access to continue in both legal and practical terms.

7.3          Throughout the coming years, a strong dialogue between the UK and Jersey government will be of the utmost importance.

7.4          We are grateful for the Justice Committee’s consideration of this submission and would welcome further engagement on the impact of Brexit on the Crown Dependencies.

12 December 2016