The IFC Review speaks to Mark Field MP for the cities of London and Westminster, a vocal proponent of International Finance Centres.
IFC Review: The British Overseas Territories and the Crown Dependencies are listed amongst the top 30 international finance centres – how important do you feel their contribution has been to the global and more specifically the UK economy?
Mark Field: The British Overseas Territories and Crown Dependencies play an important role in helping to allocate capital efficiently. To this end they act as important financial intermediaries which match the capital provided by savers in one country with the investment needs of borrowers in another.
Many small IFCs are able to offer a stable, well-regulated and neutral jurisdiction through which to facilitate international and cross-border business. Investment channelled into small IFCs in turn provides much needed liquidity, further investment opportunities, competitiveness and access to capital markets for businesses and investors in both the major developed economies and emerging market countries.
When it comes to the UK, there is a huge mutually beneficial relationship between the City of London and many Crown Dependencies and Overseas Territories, demonstrated not only by the massive capital flows between the two which aid market liquidity and investment in the UK, but also legal and constitutional similarities and the transfer of skilled professionals.
IFC: IFCs were used as scapegoats during the financial crisis - what can IFCs do to improve the public perception of them?
MF: The trouble IFCs face is that they tend only to make headlines when there are high profile stories of tax avoidance – I recall most recently of the Jimmy Carr tax scandal which involved a Jersey-based accountancy arrangement. As a result, the public broadly, and quite understandably, believes that small IFCs are used only by the wealthy for the purposes of avoiding their financial obligations at home. This is a toxic perception in these times of austerity when income disparity is becoming a subject of fierce public debate.
The voice of the Crowd Dependencies and British Overseas Territories has largely been absent in these media stories, whether through a timidity to make their case or a lack of interest by journalists in learning about the wider benefits of small IFCs. I think much IFC focus has been on strengthening relations with people and institutions who are already onside. Perhaps there needs to be a much broader campaign which reaches out to sceptics. I would also recommend that those IFCs which, for instance, meet international standards on transparency and co-operate in fighting financial crime take steps vigorously to distinguish themselves from some of their shadier counterparts.
IFC: You have been quite vocal in your support of IFCs – how difficult has it been to encourage debate on this subject in the current climate?
MF: There is an important public debate at the moment about the societal obligations of the wealthy. Too often the public is being told that they have to accept the terms being dictated by that wealthy portion of the population else they will flee elsewhere and take their money with them. This belligerent and arrogant approach is stoking public anger and making it difficult to talk openly and dispassionately about a variety of issues, particularly taxation. This naturally extends to small IFCs. Mainstream politicians have not the confidence to make the case for lower taxes for all and therefore find it easier instead to argue for punitive taxes on the wealthy and to rail against the reduction of the overall tax burden. In this context, small IFCs are presented as opponents of this orthodoxy, making it difficult to engage people in an objective analysis of what they bring to the financial mix. But that does not mean I shy away from that challenge.
IFC: What do you believe is the role or function of an IFC?
MF: I have described this broadly above, particularly with regard to small IFCs acting on a hub and spoke basis with mainland UK, the massive capital flows between the two aiding market liquidity and overseas investment.
Small IFCs often play an important role in aiding developing countries as well, however, by enabling such nations effectively to ‘rent’ financial expertise from other countries while they develop financial centres of their own. Crucially, they also offer investors greater protection of their property rights against domestic political uncertainty. It is no exaggeration to say that without smaller offshore financial centres many developing countries would not secure key funding for project finance which makes a substantial contribution to the improved lives of the most vulnerable global citizens.
IFC: Have IFCs been unfairly discriminated against in their treatment by pan national bodies such as the OECD?
MF: I do not think it helpful for IFCs to view themselves as victims. The financial crisis that crashed into global consciousness in 2008 ensured that searching questions were asked of all financial centres, big and small. However it would be fair to say that small IFCs were at a disadvantage in making their case as they at times provided a useful scapegoat for regulatory failure in larger financial centres.
IFC: Having been scrutinised closely by the OECD et al over the last 20 years has the time not come for that scrutiny to be turned elsewhere – eg, at the main centres of international finance?
MF: The implication of this question is that main centres of international finance are not being closely scrutinised at the moment. I can assure you from representing the City of London that this is not the case!
IFC: In terms of global financial standards – what steps should governments be taking to prevent future crises?
MF: I think a great deal has been done to make the balance sheets of banks more robust, particularly with regard to capital requirements. I still do not think that the question about the separation of banks’ retail and investment arms has been successfully settled. In the UK we are looking at the Vickers ringfencing idea and we now have the EU examining a similar proposal following the Liikanen report but I remain to be convinced about the practicalities of either. There is a superficial attraction in returning to a Glass Steagall-style formal separation to reduce systemic risk and any potential burden on the taxpayer. However this would only be practical if applied on a global basis and I suspect we are a long way from that happening. It also contains the implicit complacency that retail banks are somehow risk-free. Never forget that banking is an inherently risky business. Aside from all this, one of my continued concerns is that we are focussing on how we might have prevented the last crisis rather that what might precipitate the next one.
IFC: One aspect of the US’ response to the financial crisis has been the enactment of the FATCA legislation, which has been cited as the ‘world’s most wide ranging tax compliance programme’ – do you feel this is an appropriate and effective path for the US to take?
MF: Time will tell both if the hype and, more important still, the effectiveness of FATCA are established. Whilst few would argue that tax compliance involving foreign financial assets and offshore accounts should be improved there must be some concern that this will result in yet more tax evasion and an expansion of unregulated financial institutions. This is work in progress, but we should welcome the US authorities/IRS taking their responsibilities over US citizens seriously in the world of globalised finance.
IFC: Do you think the regulation and transparency of the small IFCs is comparable with that of central financial centres such as London or New York?
MF: As I have said before, there is a danger in lumping all small IFCs into one. I think there is a vast difference between regulation and transparency standards in the Crown Dependencies (Isle of Man, Jersey and Guernsey) than, say, the Cayman Islands and BVI. Many small IFCs have shown willingness to engage with the concerns raised over their tax regime. Guernsey, for example, voluntarily undertook a Corporate Tax Review to act within the spirit of the EU Tax Code of Conduct Group and an IMF review of Jersey’s regulatory standards concluded that Jersey was in the “top division” of financial centres, giving it the highest ranking ever achieved by a financial centre in terms of its compliance with FATF recommendations.
IFC: How important is it for jurisdictions to be tax competitive in today’s global market?
MF: As it will be increasingly difficult to differentiate on grounds on regulation, tax competition is likely to become an essential USP. Every nation now needs to grasp quickly that we operate within a tough and competitive global economy. The UK cannot expect its tax regime not to have an impact on its economic attractiveness as place in which global businesses and individuals may wish to invest and the same applies to small IFCs. Rather than sniping at small IFCs, the UK and Europe should welcome the case they make for efficient, low tax economies as a welcome warning about continental complacency.
IFC: Can and should the UK government be doing anything more to support the financial services sector of the Crown Dependencies and Overseas Territories?
MF: The debate within the UK government has naturally been framed by events surrounding the collapse of Iceland’s banking system. When the Icelandic banks imploded in September 2008, it quickly became apparent that the contagion would spread to British savers and ultimately to the British taxpayer. Furthermore, the role of the Isle of Man as a core financial intermediary between British savers and Icelandic borrowers illustrated the UK’s exposure to offshore centres.
However, the subsequent Treasury Review undertaken by Michael Foot went some way to allaying the two main concerns and has helped the UK government make the case more confidently for small IFCs. In particular, the worries over the fiscal sustainability of UK Crown Dependencies proved to be overstated. Throughout the past years IFCs like Gibraltar, the Isle of Man, Guernsey and Jersey have amassed large budget surpluses while diversifying their tax base as Foot recommended. Indeed the Foot Report commented on the fact that none of the Crown Dependencies have taken on significant levels of borrowing.
The government is committed to working in the international arena to ensure there is no discrimination against well regulated offshore financial centres and has encouraged the same international standards to be applicable to all jurisdictions. That work must continue in order to ensure that, say, Macau does not get advantages that do not apply to a Crown Dependency like Jersey simply because the Chinese government may have been more robust and confident when it comes to international negotiations.
IFC: What role if any can IFCs play in helping the UK out of this current economic slump?
MF: The Crown dependencies provide an important platform from which to learn about and access the British economy. For example, the Isle of Man acts as the number one jurisdiction for the incorporation of Indian businesses listed in London, and has been identified by a Chinese Government economic unit as an important link in China’s “going out” strategy in relation to Chinese businesses setting up in the EU.
Similarly, with fledgling satellite, space and film businesses (to name but three), not to mention its shipping and aircraft registration expertise, the Isle of Man brings into a British sphere of influence important strategic global businesses that might otherwise be drawn to a competitor such as Singapore, Hong Kong or the US. The Crown dependencies are keen to continue acting on this hub-and-spoke basis with the UK and adding value to Britain’s international offering in a proper and transparent way and it is here that IFCs can help the UK access precisely the markets in Asia and beyond that we need to, and they us, if we are to get out of this period of stagnation.
IFC: What role do you think IFCs can play in supporting the global economy going forward?
MF: As I have said above, I think IFCs play an important niche role in the efficient allocation of capital across the global economy. The liquidity offered by IFCs may well prove essential for established economies in the event of a future credit crunch.