IFC Economic Report speaks to industry stalwart , Marcus Killick about the ambiguous perception of the roles of the specialist financial centres in Europe and what the future holds for them post-Brexit.
What is the raison d’etre for specialist international finance centres in Europe and how has their role changed in the last few decades?
MK: By far the largest international finance centre (IFC) in Europe is London. Other EU financial hubs, commonly referred to as IFCs, include Dublin, Luxembourg, Malta, Gibraltar and Cyprus. Other finance centres such as Paris and Frankfurt are, in reality, IFCs but are generally excluded by most of the torturous definitions of IFC used. Outside the EU, The Channel Islands and the Isle of Man are regarded as IFCs.
In reality, to be an IFC, one simply has to conduct a considerable amount of one’s business with clients outside one’s own jurisdiction. In the context of the EU, the single market and the free movement of services it created gave every centre the chance to be an IFC. Passporting of financial services across jurisdictions was not merely allowed but encouraged. Minimum standards were imposed by various Directives and countries stopped from imposing artificial barriers to entry. The result was more choice, more competition and better prices for consumers. Some centres specialised in one financial area, others have developed their expertise in different ones. This allowed centres to thrive when the economies of scale in only playing to a national market would have prevented their growth.
IFCs, like the markets they serve have changed radically. In recent years we have seen a decline in banking and its replacement with Fin Tech activities such as crowd funding and peer to peer lending, an evolution that is now irreversible.
Until comparatively recently, IFCs have been regarded as shady places where dark deeds are done. Tax evasion and money laundering are but two of these alleged dark deeds. Without a doubt significant laundering and evasion did occur, with London being where the greatest amount took place, due simply to its size. Without doubt these activities occurred. However the increase in transparency, imposition of new standards, enhancement of regulation and the independent inspection of centres to assess compliance, has driven much of this out. It would be foolish to claim these abuses have been eradicated but they have been substantially reduced.
2. What are the key services that Europe’s IFCs provide?
MK: Successful IFCs know that to survive four factors are needed. They must be cost competitive, they must have a decent reputation, have access to the international market, and their infrastructure must be effective. By infrastructure I mean, they need a responsive regulator and a supportive Government, willing to promote new financial products and services and create the legislative framework for them to thrive. They also need a skilled workforce and knowledgeable support services such as accountants and lawyers.
How important are the Crown Dependencies and Gibraltar to the UK and the European economy?
MK: They aren’t important. They could cease to exist tomorrow and the UK and European economies would barely skip a heartbeat. The reason for this is that it is the role they perform which has a significant importance, not the jurisdictions themselves. Most services they provide are not unique, other centres also provide these. No centre is indispensable; no centre can afford the luxury to think it is. If any centre fails to maintain the four factors I referred to above, the global financial community will simply move to somewhere that does.
What are the main concerns facing the CDs and Gibraltar from Brexit?
MK: Being the only one of the four with passporting rights under the Single Market, Gibraltar is clearly the most exposed to a hard Brexit under which it is excluded from this market. Yet, as the vast majority of Gibraltar’s business is with the UK, and continued access to the UK has been guaranteed by the British Government, the impact is muted. Of greater concern to Gibraltar is the border with Spain and ensuring that this remains free flowing. Given the importance of Gibraltar to the regional economy in Spain it is likely that this free movement will continue.
Are there opportunities that may arise for them from Brexit?
MK: In the case of Gibraltar, ironically, a hard Brexit for the UK will provide opportunities. If the EU is foolish enough to preclude the UK from market access, the UK will obviously reciprocate. This would mean that, if you are an insurer or asset manager in the EU wishing to do business with UK clients after Brexit, you would need to either establish a presence in the UK and be licensed there, or go to one of the few locations/only location which can passport in, namely Gibraltar.
The ‘onshore’ financial centres across Europe have been facing ongoing political and economic turmoil over the last decade – do you think the small specialist IFCs have been sheltered from the worst of this turmoil?
MK: Some IFCs were quite badly hit by the aftershocks. The failure of Northern Rock and the collapse of the Icelandic financial system, for example, hurt some IFCs. The subsequent retrenchment by financial institutions such as RBS and Barclays has also affected the IFCs as institutions have reduced their global footprint and left some jurisdictions. However, the Crown Dependencies and Gibraltar have proved their resilience to what happened. It must also be remembered that, despite the claims of some that the smaller centres presented a systemic risk, the truth is that the risk came from what was being done in the largest centres.
Can the IFCs provide some form of stable alternative to the more troubled onshore centres in certain areas of investment or business?
MK: Not especially. All financial centres are subject to much stricter rules than before the crisis. If these rules prove to be effective and are properly applied then the global system will be stable. Individual jurisdictions will falter and some fail, but this will be as much a political failure as a financial one. Those in risky jurisdictions may well wish to place their assets in a safer location. Some may choose an IFC but not all IFCs were created equal in their own stability.
With increasing regulation of the financial services sector and the drive towards automatic exchange of financial information, alongside the reputational damage that comes by default from the likes of the Panama papers scandal, can centres such as Malta, Gibraltar, Guernsey, Luxembourg etc continue to be sustainable and growing financial hubs?
MK: Tax transparency and the automatic sharing of financial information across jurisdictions is a way of life now. As long as it is consistently applied and enforced then there is no real impact. IFCs tend to have lower tax levels, which is entirely legitimate. As such they will remain competitive.
Regarding the Panama papers, most of what they disclosed was entirely legitimate. Clearly some was questionable although much of the illicit activity disclosed was historic, some going back decades. What was revealed should be considered on the merits of its own case. It should not be seen at representative of what happens in IFCs today.
How important is the continued growth of the financial services sectors within these centres both for the jurisdiction in which they are based and for investment flow into and from Europe?
MK: As I stated earlier, individual centres are expendable, the services they provide are not. That will remain true after Brexit, both in respect of the UK and the EU. What happens next is beyond our control, but our flexibility and proven adaptability gives a cause for optimism not pessimism when looking to the future
How can Europe’s IFCs cement their position as necessary cogs in Europe’s financial architecture?
MK: Continue doing what we are doing whilst improving, adapting and innovating as we go. If we do that the business will still flow. To paraphrase Field of Dreams - “If we build it they will come”.
Marcus Killick OBE
Marcus is Chief Executive Officer at ISOLAS LLP and is a retired English Barrister and member of the New York State Bar as well as a Chartered Fellow of the Chartered Institute for Securities and Investments. Prior to joining ISOLAS, Marcus was Chief Executive Officer of the Gibraltar Financial Services Commission. Marcus also sits as a non-executive director on a number of boards including the Gibraltar International Bank and BetVictor. He is also a non-executive member of the Independent Monitoring Authority set up to safeguard EU citizens’ rights in the UK and Gibraltar post the UK leaving the EU. Marcus was awarded the OBE in the 2014 New Year’s Honours List.