We asked leading commentators from across the international finance industry: What opportunities or challenges will Brexit create for the financial services sectors of the City of London, Overseas Territories and the Crown dependencies?
“There may also be challenges due to the decline in the UK’s influence over EU financial services legislation and policy following the referendum vote to leave the EU and a subsequent Brexit.”
“It is unlikely that financial services firms will retain the ability to offer their services to EU members unless and until they establish an equivalent financial license somewhere within the EU.”
“A more robust approach to non-members could also see the Overseas Territories and Crown Dependencies face countermeasures if significant transparency improvements are not delivered.”
“Following Brexit, the CDs will continue to face many business opportunities in the provision of financial services to wealth
“Without having to directly follow certain EU directives, the Isle of Man has the opportunity to enhance certain offerings and become even more client-centric.”
“A quick fix of lowering taxes to maintain the UK’s position as a financial hub may seem tempting in an uncertain economic landscape, but in the long run will only be harmful to the UK and other countries.”
“The outcome of the referendum does not change the constitutional relationship between the UK and the Territories; nor does it in anyway reduce our commitment to them.”
The UK government has confirmed that when preparing for negotiations with the EU on Brexit it will consult the Overseas Territories to ensure that the interests of all parts of the UK are protected and advanced. The Overseas Territories have diverse economies and some may take the opportunity to become directly involved in negotiations on specific matters of concern to them, which could include financial services where relevant, even though this is not the UK’s preferred approach. There is now an opportunity for the financial services
sectors in the Overseas Territories to inform their relevant government of any aspects of the industry that they are concerned will be affected directly or indirectly by Brexit, so that this can be taken into account when negotiations start with the UK / EU. We expect however that the ending of the Overseas Country and Territory relationship between the EU and Overseas Territories such as the Cayman Islands, Bermuda and the BVI will not materially impact
on the scope or viability of the financial services industries in those jurisdictions.
Brexit may impact foreign policy, including economic and financial sanctions and restrictive measures, as, although EU regulation is not usually implemented in the Overseas Territories
as they are outside the EU, currently the UK directly applies EU-origin sanctions
to its Overseas Territories. Following a Brexit, UK foreign policy can be expected over time to start to differ from the EU’s policy, including in the way it deals with countries currently subject to sanctions. How it will differ and whether any change would be an opportunity or challenge for the financial services sectors in these jurisdictions is speculation at this stage.
There may also be challenges due to the decline in the UK’s influence over EU financial services legislation and policy following the referendum vote to leave the EU and a subsequent Brexit. This may impact the likely process of the EU in creating its “common EU list of problematic tax jurisdictions” by the end of 2017. The political element of this is
very high and the likely absence of the UK as an influential voice increases the risk that this ends up being an attack on low tax jurisdictions. This would obviously raise challenges for the Cayman Islands, Bermuda and the BVI, notwithstanding their full compliance with the OECD’s transparency requirements.
ESMA’s recent advice on whether to extend the AIFMD passport for marketing alternative investment funds to certain third countries noted that there are no significant obstacles regarding competition and market disruption impeding the application of the AIFMD passport to the Cayman Islands and Bermuda. ESMA delayed its definitive advice on extending the passport to these countries however as both countries are in the process of implementing new AIFMD-like regulatory regimes and other legislative changes. It is hoped that once those regimes and changes are in place, the opportunity to be included in the third country passport regime will be extended to the Cayman Islands and Bermuda, along with other jurisdictions like Jersey and Guernsey which have already been approved by ESMA, regardless of any Brexit.
There has been a lot of comment suggesting that Brexit gives the opportunity for the UK to become an offshore financial centre, whatever that means. The theory appears to be that
following Brexit the UK will no longer be bound by EU directives which prevent members from offering tax or other incentives which are deemed by the EU to be state aid or unfair competition. That could be true but there will be two competing pressures. The first is that to negotiate any form of trade agreement with the EU it seems it will be necessary to agree to a contribution to EU coffers and for the UK to continue to allow free movement of EU residents and establishment of EU companies. In short it is difficult to see that much will
change. It appears as though many who voted for Brexit did so on the basis that they wanted the UK to be in control of its own borders and it was not generally appreciated that to get a trade deal free the current immigration situation would most likely have to continue. Secondly, the UK government has been at the forefront of efforts by the EU, OECD and G8 to stamp out any form of tax avoidance or erosion of the national tax base. It would hardly be moral if the UK was to undermine those efforts by trying to steal business form the rest of the EU by becoming a ‘tax haven’ itself or now encouraging the low or no tax rates in
the overseas crown dependencies and overseas territories.
The UK currently attracts many wealthy individuals to become UK resident because it offers very attractive tax deals to those who are not domicile in the UK. There has been frequent tinkering with the legislation aimed at getting some tax from these non-doms. It
started with the imposition of a £30,000 per annum levy for those who had lived in the UK for more than seven years and wished to continue to be taxed only on a remittance basis. That levy was then increased to £50,000. And there has been alterations to property taxation to remove inheritance tax advantages otherwise gained by non-doms in particular by putting their property interests in company or trust structures. Another raft of legislation has just been announced. So it seems unlikely that Brexit brings about any additional opportunities for the UK.
Brexit does have potential implications for the City of London which is unlikely to be able to have the same rights to passport financial services into the EU. It is unlikely that financial services firms will retain the ability to offer their services to EU members unless and until they establish an equivalent financial license somewhere within the EU. That would appear to bring about opportunities for places such as Malta and Cyprus which already attract firms to their territories by offering a very low tax option and full access to EU markets. Gibraltar is potentially adversely affected by Brexit. Gibraltar is a full member of the EU having joined as a designated territory the same time as the UK. Under Brexit it will no longer be an EU member so will have no passporting rights to the EU.
Additionally, Spain has already indicated that it will re-start talks over the sovereignty of Gibraltar and is likely to start making life difficult at the Spanish/Gibraltar border. Gibraltar fears Spain may even shut the border again. This would have serious implications as much of the workforce in the Gibraltar financial centre lives in Spain and commutes over the border every day. It is unlikely that Gibraltar could find accommodation for all these people if they wished to move into Gibraltar, or that they could be replaced if they didn’t and couldn’t get in to work every day. Gibraltar firms are already considering establishing subsidiaries in Malta or Cyprus as a contingency plan.
The Brexit vote has created a real risk that the UK turns sharply towards tax havenry. There are two main concerns here, related to corporate tax and to financial secrecy. Both pose
risks for the UK itself, and beyond. There is also, however, a possibility that Brexit could result in the imposition of better regulation, for the UK and its territories.
The UK has, since 2010 at least, sought to position itself as an attractive destination for multinationals’ taxable profits. This has been in part through steadily lowering tax rates, despite official analysis indicating no expected increase in the tax base. In other words, this constituted a pure giveaway of revenues during a time of harsh spending cuts with real, human impact – prompting unprecedented criticism this year from a UN human rights treaty body.
The other aspect has been the defence at the EU and OECD of the UK’s preferred profit-shifting mechanisms. One effect of this has been that rather than abolishing the use of ‘patent box’ mechanisms internationally, the OECD has ended up legitimising it – with
multiple countries now adopting it, which if anything makes the global problem of profit shifting worse rather than better.
Since Brexit will sharply reduce the UK’s attractiveness as a location for real investment, the danger is that further rate cuts and avoidance mechanisms are rolled out to attract less substantive capital flows instead. Already we’veheard these economically unsound, but superficially appealing calls from politicians and the media.
The other major risk arises from an equivalent race to the bottom on financial regulation. Again, the temptation may exist to make up for lost market access (should that come to pass) by competing with the most ill-regulated ‘offshore’ centres. Aside from all the longer-term risks that the crisis of 2008 laid bare, such an approach is likely in the medium term to exacerbate regional inequalities, driving further social division between London and the rest of the UK.
Perhaps oddly, the best hope in each regard may be that the UK’s loss of influence in Europe may lead to better policy there – in respect, for example, of public registers of the beneficial ownership of trusts as well as of companies which the UK had blocked. A more robust approach to non-members could also see the Overseas Territories and Crown Dependencies face countermeasures if significant transparency improvements are not delivered.
While some will see short-term costs as dirtier capital flows are lost, this will ultimately deliver benefits in the form of cleaner and more sustainable financial sectors – as well as reduced risks of corruption and tax abuse elsewhere.
In considering what opportunities or challenges Brexit will create for the financial services sector of the Crown Dependencies (CDs) it is important to recognise the difference in the position of the CDs from that of the UK. The CDs have been outside the EU and have been
treated as a ‘third country’ for trade in financial services since 1973. However much of what the EU has adopted for the regulation of financial services, for AML and for tax transparency has been matched by the CDs, not least to satisfy the ‘equivalence’ upon which EU market access depends, and this experience should be of relevance for the UK in preparing for its
future role as a ‘third country’. The CDs will continue to draw in capital from all over the world which then is available to support investment opportunities within Europe. This
is because the factors behind their successful development as international finance centres will remain unaffected by Brexit. These include –
• a favourable tax structure;
• the ability to respond quickly and
flexibly to market needs;
• the quality of the services provided.
Thereby the CDs should continue to appeal to those who traditionally have used the CDs for the secure deposit of funds, the protection of a trust, and investment in mutual funds.
The challenges of Brexit come mainly from the effect on business decisions of future uncertainty. It will be important that users of the financial services sector recognise that the core attractions of the CDs remain. This will also be in UK’s best interests because much of the capital the CDs attract will continue to be reinvested through the City.
The general view therefore is that, following Brexit, the CDs will continue to face many business opportunities in the provision of financial services to wealth creators worldwide. The challenges will largely be to convince those concerned that Brexit does not detract from the CDs’ fundamental attractions as international finance centres.
The Isle of Man Government began planning for the event of Brexit months before the votes were cast. In the run-up to the vote, the Island’s Government issued two reports on the
implications of the referendum; the first setting out the likely impact on the Isle of Man, and the second, on the possible next steps for the Crown Dependencies and the UK. Since the result, the data gathering exercise has now begun and we are assessing the size and impact of the incoming changes throughout Government. This involves going through every Department, every piece of legislation and indicating if there is an impact, whether it is EU related, whether there is a precedent and what the Isle of Man will do about it.
With regard to the financial services sector, in an abstract way, the Isle of Man is in a relationship with Europe now in the same way that the UK will be going forward. However, some aspects of our industry that were naturally changing may be slowed because the UK
won’t be sitting there at the same table with the EU and will have to liaise via trade agreements.
A key opportunity, particularly for the Isle of Man, is that Brexit will not change the Westminster policy for regional investment. With EU funding money gone, a number of businesses will be looking elsewhere for funding. The Isle of Man’s £50million Enterprise Development Scheme and experienced financial and professional services sector could see a real opportunity in businesses looking to expand internationally. Plus, without having to directly follow certain EU directives, the Isle of Man has the opportunity to enhance certain offerings and become even more client-centric.
The Isle of Man is in continuing discussions with the financial services sector. The Government is easy to access and there are a number of opportunities for local businesses to share elements that they want considered in the Brexit negotiations.
With Brexit, the UK - including the financial services sector of the City of London, the Overseas Territories and the Crown Dependencies - will need to redefine its role in the world. Economic strategies for the broader economy will need to be reconsidered, and the UK will
need to establish what its relationship to other countries, including developing countries, will be.
A quick fix of lowering taxes to maintain the UK’s position as a financial hub may seem tempting in an uncertain economic landscape, but in the long run will only be harmful to the UK and other countries. Lowered taxes lead to a race to the bottom where everyone ends up at the bottom and no one suffers more from this than developing countries who are disproportionately dependent on corporate tax revenue. In fact, the International Monetary Fund (IMF) has found that corporate income taxes account for about 16 per cent of government revenues in low- and middle-income countries, compared to just over eight per cent in high-income countries.
Theresa May has the opportunity to set out a new vision for the UK economy without forcing a global race to the bottom on tax rates, and to continue her predecessor’s efforts to tackle global tax dodging in all its forms through further reforms to international rules and increased transparency around tax issues. This should include making multinational corporations to publicly disclose their tax affairs in each country they operate, including developing countries.
The UK, including its Crown Dependencies and Overseas Territories, need to find its way in a post-Brexit world - but becoming a tax haven is not the answer.
I was delighted to be made Minister for the Overseas Territories following the EU referendum vote. The outcome of the referendum does not change the constitutional relationship between the UK and the Territories; nor does it in anyway reduce our commitment to them.
As Minister, I look forward to engaging with these diverse and fascinating islands and working with them to develop their potential.
I recognise that Brexit will have an impact on the Overseas Territories. We will fully involve them, the Devolved Administrations, and the Crown Dependencies, in accordance with their various constitutional relationships with the UK, in the process to exit the EU. This will ensure that all of their interests are taken properly into account. We will seek the best possible arrangements for them and for the UK in our future relations with the EU. At the same time we are going to make the most of the opportunities that our departure presents – getting out into the world and doing business right across the globe.
My ambition for the Territories is for them to be secure, successful and economically
sustainable. The Territories have huge potential financially. Many have advanced from their predominantly agriculture and fishing based economies. Bermuda, the British Virgin Islands, Gibraltar and the Cayman Islands have significant financial centres, and all of the Territories are attractive destinations for tourists.
The Territories should build on this progress and continue to explore opportunities to strengthen and diversify their economies, and the UK Government will work with them to ensure this. Although small in size, the Territories are open and dynamic economies with exciting prospects for investment and trade. Brexit provides an important opportunity for the Territories to deepen and broaden their economic links with the rest of the world, including Europe.