Following five challenging years for Jersey, Kevin O'Connell examines how the island is future proofing its financial service offerings.
Few could dispute that the last five years have been challenging for Jersey. This tiny Crown Dependency does however have an enviable history of successfully adapting to change, identifying and investing in opportunities and creating new markets in all corners of the globe.
The global economic downturn is the latest challenge for Jersey’s finance industry and indeed the Island as a whole. Financial services provide work for more than 12,000 people and generate expenditure within the island of around £400 million - and almost £300 million a year in taxes.
But opportunity can always be found – as history shows - and the recession in Europe and the USA has been no exception. New markets were identified despite the banking crisis and Jersey immediately laid the foundations for their development. Starting with robust regulation and legislation and the development of new products and marketing strategies the island has enabled, created and facilitated investment and wealth management opportunities for entrepreneurs, businesses and ultra-high net worth (UHNW) clients.
There has also been recognition that to remain a world-class IFC doing business on an international stage Jersey’s interaction and profile on the world stage are key to its success and sustainability. Moreover, the standard had to be high enough to be acceptable to everyone on that stage and in particular Governments and their appointed international regulators. To that end the local Government has carried out extensive work to assess how Jersey can best position itself as a jurisdiction with truly global appeal.
The Finance Industry Strategic Jurisdictional Review
The Jersey Financial Services Commission and Jersey Finance have made significant progress in helping to put the Island at the forefront of efforts to increase cooperation and transparency in taxation and related issues. This has been essential in maintaining awareness of Jersey as a well-regulated IFC and demonstrating that it’s a good place to do business.
Two heavyweight reports were completed in 2013. The first was supported by McKinsey, the international consultancy firm, with the aim of securing Jersey’s future as a leading IFC. The second study was produced by Capital Economics, a leading London-based economic research firm, which took a hard look at the impact of Jersey’s finance sector on the UK economy.
The findings of the McKinsey Review saw the outlook as promising for Jersey, reporting that:
Cross-border investment flows will accelerate
Tax regimes will not be harmonised and competition between jurisdictions will remain
Wealth accumulation will increase rapidly, particularly in emerging markets, while political instability will remain an important factor in investment decisions
The analysis concluded that there is a strong long-term future for Jersey, if it can successfully tap into the growth in cross-border investment flows and provide services to the wealth creators in the growth markets.
The Capital Economics report stated that, in relation to Jersey’s value to Britain, if Jersey did not exist, 84 per cent of the Island’s financial services business would be at risk of leaving the sterling zone. Consequent investment would migrate to other offshore centres - not to London - costing the equivalent of around 150,000 British jobs.
The overall conclusion was that Jersey and the City of London have a symbiotic relationship, with both benefitting and supporting each other. There is undeniable evidence that the Crown Dependencies actually support the British economy. In 2013, David Cameron declared that it was no longer “fair” to label IFC’s ‘tax havens’, recognising the lengths the islands had gone to prove their credentials on transparency, stating "The Crown dependencies and overseas territories, which matter so much - quite rightly - to the British people and members have taken the necessary action and should get the backing for it."
State of Play
FATCA: US and UK
Negotiations opened in 2012 with the US on an agreement over arrangements to implement the Foreign Account Tax Compliance Act (FATCA).
Following consultation with the Island’s finance industry, Jersey agreed a package of tax measures with the UK Government on similar terms and, in October 2013, Jersey signed an intergovernmental agreement (IGA) on automatic exchange of tax information between Jersey and the UK. The IGA with the UK is similar to the FATCA agreement with the United States, which was signed in December. Both agreements and are closely aligned with those agreed by the other Crown Dependencies.
FATCA is an example of legislation which should stand the jurisdiction in good stead moving forward. The world is becoming a smaller place as exchange of information becomes much more common place. As far as IFCs are concerned, it’s a case of survival of the fittest and Jersey, in line with the other Crown Dependencies, should now be well placed to take advantage of this more structured future, by providing a common response in relation to FATCA.
Jersey fully supports the OECD Convention on Mutual Administrative Assistance in Tax Matters and was one of over 30 countries to commit to early adoption of the Common Reporting Standard which, like the Competent Authority Agreement, will further promote a level playing field in the area of tax information exchange.
Since the Convention can only be signed by a sovereign state, Jersey’s Chief Minister took a ministerial decision in September 2013 to prepare draft legislation that would extend the UK’s ratification of the Convention to Jersey. As a result, Jersey anticipates becoming party to the Convention in May 2014.
Overall, these reforms will help the Island to further its cooperation with global authorities and allow greater global investment, from which Jersey should be well positioned to benefit in the future.
Jersey’s reputation as the pre-eminent jurisdiction of choice for fund structuring has been enhanced by 2013’s landmark bolstering of Jersey’s legal and regulatory framework arising from the EU’s Alternative Investment Fund Managers Directive (AIFMD).
Jersey was the first offshore jurisdiction to implement a fully compliant AIFMD regime, ahead of last July’s introduction date and AIFMD co-operation agreements have been signed with virtually every EU Member State. Alternative investment fund managers using Jersey can continue to market their products seamlessly into Europe through private placement rules until at least 2018.
It is extremely encouraging that we are not just seeing sustained use of Jersey structures across real estate and private equity asset classes, but that the funds now being structured through Jersey are some of the most ground-breaking transactions completed in recent times. They involve both European assets and non-European investors and reflect Jersey’s flexibility as being AIFMD compliant whilst also providing a home for non-EU funds that fall outside the scope of the AIFMD.
Niche Market Appeal
Due to its sound financial, regulatory, tax efficient and support service infrastructure, Jersey is also becoming an increasingly attractive jurisdiction of choice for niche markets such as mining and eGaming. In terms of the Island’s reputation as a centre for international mining companies, there are currently nine mining companies in Jersey with a significant management and executive presence, some having had their headquarters in the Island for over ten years, with five relocating to the island in the past three years alone. Furthermore, confirmation that Jersey’s own dedicated Aircraft Registry will have wings from mid-2014 is also a positive step for the island
Cross Jurisdictional Focus
There has been great focus on new and existing international markets with government visits to Dubai, Abu Dhabi, China, Africa and India. Jersey has been positioned and promoted to China as the gateway for investment into the European Union.
The result of this foundational work can be seen in the current plans for Jersey Finance to increase its resources in Africa, appoint an additional representative in Dubai and launch a new office in Shanghai. Add to this the increased promotional activity in Greater China, Russia and India and it is clear Jersey really does want the world to know that the store is open for business
In October 2013, an amendment to Jersey’s trust law came into force to incorporate the so called Hastings-Bass rule into statute. The rule, which emerged from case-law, has traditionally allowed trustees who have made a costly mistake to apply to have their actions voided. This allowed adverse consequences to be nullified without the need for the trust beneficiaries to sue the trustees for negligence or breach of trust. Following a UK Supreme Court decision in 2013 however, the value of Hastings-Bass was seriously undermined. As a reaction, the Trusts (Amendment no 6) Jersey Law 2013 confirms the Jersey’s Royal Court’s ability to provide discretionary relief where beneficiaries find themselves materially prejudiced by trustee’s decision. It is not necessary for the fiduciary to be shown to be at fault; moreover the amendment has a retrospective effect.
Meanwhile, the Security Interests (Jersey) Law 2012 came into full force on 2 January 2014. The main aim of the law is to provide the financial services sector on the island with a simple, modern and efficient regime to the creation, perfection and enforcement of consensual security interests as well as deal with priority issues and the possibility of transferring the security interests by way of assignment. The result will be to give Jersey one of the most modern legal regimes in this area and enhance its attractiveness to foreign investors.
Awards and Accolades
Amongst a long list of ‘best in class’ IFC achievements, Jersey is the highest rated offshore jurisdiction in the Global Financial Centres Index (GFCI) and, crucially, in November confirmation came of Standard and Poor’s AA+ credit rating, with its forecast for a stable outlook. In addition, S&P assigned its highest level short-term rating of A-1+.
Putting its Best Foot Forward
Five years after the banking crisis the economy is healing but the global financial landscape has changed dramatically. Focus has shifted from ‘traditional’ markets such as Europe to new emerging markets that previously were in the back seat. Jersey has, typically, reacted well to this shift and diversified its services to cater to the new requirements of these markets by tailoring new legislation and regulation to ensure its survival. So as we dust ourselves down after five years of turmoil and uncertainty, the current state of play suggests that Jersey is heading in the right direction.
The latest figures for all sectors of Jersey’s finance industry illustrate a solid and encouraging performance during 2013. Furthermore, the latest figures from Jersey’s Business Tendency Survey suggest that at the start of 2014, the finance sector is positive about its long-term prospects, with firms reporting their highest levels of optimism about future business activity, profitability and employment since 2011.
Kevin O’Connell, Group Commercial Director, First Names Group, Jersey