HM Government of Gibraltar – Written Evidence (FRS0015)

HM Government of Gibraltar and the Gibraltar Financial Services Commission welcome the opportunity to respond to the call for evidence on financial regulation and supervision following Brexit, issued by the European Union Financial Affairs Committee of the House of Lords.

We concur with the House of Lords that appropriate evolution of financial regulation and supervision following Brexit is vital to ensure high standards are maintained. Our input is relevant given our status within the EU and access to the single market in financial services amongst others.

The main thrust of our contribution is as follows:

a)    Gibraltar is in a unique situation whereby, alongside all EU Member States, we also have access to the EU single market.

b)    Whilst the majority of our single market business is UK facing, there will be an impact on the economy if access to the single market to other Member States falls away post Brexit.

c)     There should be a maintenance of international standards across the board post Brexit.

d)    We are already working ‘hand in hand’ with the UK to ensure regulatory ‘equivalence of outcomes’ with each other post Brexit.

e)    We should be included in any arrangement that the UK might agree with the EU as regards the single market post Brexit.

f)      If access to the single market, post Brexit, cannot be achieved by the UK there should be a transitional period to allow markets to adapt.

1)  A Brief Background to Gibraltar, the Economy and Financial Services:

Gibraltar is a fully self-governing and fully self-financing British Overseas Territory to which the Treaties establishing the European Union apply, with only certain exceptions. We are within the EU single market for the purposes of the free movement of persons, the freedom to provide services and the free movement of capital. We are not within the Common Customs Union and we do not have to apply a VAT regime. Our status applies until the United Kingdom formally exits the European Union. We therefore expect that whatever status the UK negotiates for itself post Brexit will also apply to Gibraltar. We enjoy an excellent relationship with the Government of the United Kingdom.

EU Regulations apply directly and EU Directives are transposed by Gibraltar’s Parliament. This includes all measures on financial supervision and regulation, direct taxation and anti-money laundering. Our corporation tax rate is 10% and we have a maximum effective rate on personal tax of 25%. There is a 20% rate of tax that applies to utilities and any company that may have a dominant market position. Gibraltar also applies EU legislation on the avoidance of base erosion profit shifting and the avoidance of double non taxation.

Our taxation regime is subject to European Union scrutiny.

Gibraltar has a diversified and prosperous economy. The principal sectors of the economy include, tourism, financial services, E-gaming and shipping, port and ship refuelling. Tourism generates some 10 million visitors a year and we are a major destination for cruise calls, financial services accounts for employment of 16% of the workforce, E-gaming companies (of which there are 20 of the largest firms in the world physically present in Gibraltar) employ a similar number of individuals and Gibraltar is the largest ship refuelling port in the Mediterranean. Gibraltar has full employment, a budget surplus, net borrowing of less than 20% of GDP as well as solid GDP growth year on year. Inflation is approximately 2.6 % currently. Gibraltar’s currency is the pound sterling.

The areas of business most affected by Brexit are financial services which currently enjoys single market access in (inter alia) Insurance, Reinsurance, Insurance Mediation, Banking, Investment Services and E-money and Online Gaming. Thus in a post Brexit scenario (assuming for these purposes, a hard Brexit) Gibraltar would continue to have access to the United Kingdom market but not the other Member States of the European Union.

Post Brexit, Gibraltar will continue to apply existing commitments on exchange of information, anti-money laundering and financial supervision etc. Going forwards from that date, we will then choose whether to voluntarily apply any new EU legislation or to adopt international standards which have the same effect. We are working hand in hand with the UK on these matters to ensure ongoing ‘equivalence of regulatory outcomes’.

2)  Financial Services

Our financial services sector consists, amongst others, of three broad main areas:

Insurance

Banking and Trust and Company Management

Funds

Insurance is by far the largest contributor with approximately [50] insurance companies regulated in Gibraltar. The majority of insurance business is UK facing. There are 14 Banks in Gibraltar and most of them offer retail services and loans and mortgages to the average customer resident in Gibraltar. There are circa 68 authorised Trust and Company Management service providers and approximately 14,500 Gibraltar Companies (and that is all companies including those that are asset holding, trading or dormant). The funds industry is relatively nascent with approximately 80 funds in total.

So, with the exception of insurance, Gibraltar’s financial services sector is small in European terms. However, it is important to our domestic economy where it generates around 20% of our GDP and employs 16% of the workforce.

3)   International Standards on Cooperation and Tax Information Exchange Compliance:

Gibraltar has, pursuant to bi-lateral tax information exchange agreements, the EU Directive and the Multilateral Convention, circa 157 exchange of information mechanisms to the OECD standard with 102 countries and territories around the world. Gibraltar’s OECD 115 page Phase 2 Review report on effectiveness of exchange of information found that we were ‘Largely Compliant’ (second highest grade) and the same as e.g. the United Kingdom, Germany and the United States of America.  

We have been supplying comprehensive tax data under FATCA to the USA since September 2015 and the same under the United Kingdom IGA since September 2016. Gibraltar will send all EU Member States comprehensive tax information as from September 2017 under the Directive on Administrative Cooperation, as amended to include automatic exchange. Under the Common Reporting Standard which we committed to in 2014 we will be sending automatic information as from September 2017 to the ‘first wave’ countries, and the ‘second wave’ countries as from 2018.

4)  International Standards on Transparency and Anti Money Laundering

Gibraltar has draconian all crimes anti money laundering legislation deriving from all EU legislation on this subject. Our legislation, systems and administrative practices have been independently tested by in the past by the FATF and the IMF and we will be reviewed under the Moneyval process in 2018.  We have appointed a National Coordinator for AML, published a National Risk Assessment and are reviewing our legislation to ensure compliance with FATF principles in parallel with the 4th Anti Money Laundering Directive.

The Gibraltar Financial Intelligence Unit is a member of the International Egmont Group of Financial Intelligence Units and shares information systematically and spontaneously with all members. Tax evasion, along with all other serious crime, is a predicate offence for money laundering and subject to suspicious transaction reporting.

Gibraltar created a central register of beneficial ownership under the terms of the 4th AMLD. The Directive and the register came into force on 26th June 2017. If a global standard is agreed on public registers then Gibraltar will also adopt this standard. Gibraltar has signed up to the new global standard regarding the automatic exchange of central registers of beneficial ownership.

5)  Adherence to Global Standards for Financial Regulation:

Regulatory alignment across jurisdictions is important for any integrated market that allows firms to provide cross border services. Otherwise, there could be negative regulatory arbitrage in terms of standards. This, in turn, could threaten consumer protection and financial stability.

The financial services sector in Gibraltar is subject to regulation that is equivalent to that of many of its global and European counterparts. As Gibraltar is part of the European Union, financial services are regulated in Gibraltar to the same standards that apply in the UK and across the European Economic Area (EAA).[i]

All EU Directives, many of which are based on global regulatory standards, are integrated in Gibraltar legislation. Gibraltar is committed to adhere to existing and future international standards.

6)   International Cooperation in Regulatory Matters:

The GFSC has a strong commitment to international cooperation, recognising its importance in the context of cross-border financial services. To deliver effective day-to-day supervision and avoid negative spill-overs, GFSC actively shares information, intelligence and best practices with its European and global counterparts. This includes participating in supervisory colleges for cross-border firms, with lead regulators from other jurisdictions (in particular the UK’s Prudential Regulatory Authority (PRA)).[ii]

The GFSC is also a member of several international organisations, including  the International Organization of Securities Commissions (“IOSCO”); International Association of Insurance Supervision (“IAIS”); International Forum of Independent Audit Regulators (“IFIAR”); International Organisation of Pension Supervisors (“IOPS”); Group of International Finance Centre Supervisors (“GIFCS”);  and Group of International Insurance Centre Supervisors (“GIICS”).

The GFSC is a signatory to the IOSCO, IAIS, IFIAR and GIFCS Multilateral Memorandums of Understandings (“MMoUs”). In addition to this, the GFSC has entered into nine bilateral Memorandums of Understanding (“MoU”) to facilitate information sharing and cooperation with authorities in other jurisdictions, such as UK’s Financial Services Authority (includes both PRA and Financial Conduct Authority (FCA)); UK Solicitors Regulatory Authority and UK’s Financial Services Compensation Scheme. In addition to this, the GFSC has also signed specific MoUs with equivalent 3rd countries concerning consultation, co-operation and the exchange of information relating to the supervision of AIFMD entities.[iii] As a signatory to the various international MOUs Gibraltar is recognised as being transparent and compliant with international standards. Gibraltar was assessed as compliant or largely compliant with all, or all except one, of the relevant cooperation and information exchange standards in the most recent IMF-World Bank detailed assessment report.[iv]

7)  Continuous Improvements to Regulation and Supervision.

The GFSC remains open to and welcomes future reviews of its activities by relevant international organisations. GFSC views them as important inputs to further strengthen its organisation. One example is the MONEYVAL review on anti-money laundering and terrorist financing planned for 2018. [v]

The GFSC is legally obliged to implement standards and supervisory practices which equate to the standards and supervisory practices governing the provision of financial services in the UK. The GFSC also recognises the importance of regulation being aligned across borders, in order to prevent regulatory arbitrage and associated weakening of consumer protection and financial stability.

However, it is the regulatory outcomes that matter, rather than simply the application of identical regulatory practices. The GFSC shares the view of UK FCA’s Chief Executive Andrew Bailey, in that there “is ample evidence that open markets in financial services and free trade can exist safely without common detailed rules and shared regulatory institutions. Consistent outcomes of regulation are what matters”. 

8)  Maintaining Single Market Access / Transitional Arrangements:

Maintaining single market access across the EU on similar terms to those currently enjoyed by the financial industry is important. Any loss of market access would entail cost; both for some service providers in terms of the viability of their business models, and for consumers in terms of reduction in their current access to a broad range of services and providers.

Equivalence is one option, but this is confined to particular products and services and may be subject to a politically charged process. Regardless of the technical solutions, it is imperative that Gibraltar is acknowledged and not excluded from any agreements reached between the UK and the EU.

If single market access for the UK post Brexit cannot be negotiated, then appropriate transitional arrangements are necessary to allow industry to adapt. Such arrangements should, ideally, be sufficiently long to allow financial firms to adapt their business models while at the same time securing uninterrupted provisioning of services to consumers.

9)  Financial Innovation Post Brexit

There may be opportunities for regulation and supervision in a post-Brexit environment to stimulate development and innovation in the financial industry; not least by adopting regulation that is more accommodating to new business models as long as consumers are adequately protected.

Gibraltar’s ongoing work on developing a regulatory framework on Distributed Ledger Technology (DLT) is an interesting example in this respect. The DLT regulation, which is currently being finalised, builds on a principle-based framework to foster innovation but at the same time preserving regulatory objectives and providing consumer protection. As a modern regulator with a commitment to global standards, Gibraltar remains open to cooperate and contribute to international standards in this area.

29 September 2017