"The key is that the CDs and OTs collaborate when faced with existential threats. In the next few years, a UK Labour government, an EU without the UK as a member and the US government, all constitute a threat to the survival of the British offshore world. In the face of these threats it is largely futile for the IFCs to strive to differentiate themselves from each other."
"IFCs should certainly work together on the broadest policy issues but each jurisdiction should retain the freedom to innovate and pursue its own genius. The Latin word for competition means ‘seeking together’. Financial innovation, just like innovation during the Industrial Revolution or in the birth of Silicon Valley, often means copying and learning from one's neighbours."
"Cooperation does not exclude competition; on the contrary, it is beneficial in attracting talent, fostering innovation, custom solutions and the improvement of services. Competition is unhealthy if it is merely for the enhancement of profits and volume. Cut-throat competition is to be avoided to stave off financial crises."
"IFCs could have a bigger impact on policy debates if they worked together, although coordination need not go as far as pooling resources. I think the problem for IFCs is that they too often are playing defense and letting their opponents (whether NGOs or high-tax cartels like the OECD) set the agenda."
"Competition and cooperation are not mutually exclusive. Competition is healthy as it promotes efficiency and rewards success. However, IFCs do not exist as silos and in an increasingly interconnected world, information-sharing and building linkages are key."
The British IFCs live in a world of both competition and collaboration and always have done.
On the one hand, they compete more aggressively than the private sector believes they should. IFCs are not content to focus on building their own core clusters of excellence but also often covet the success of others and pursue too many peripheral economic development initiatives competing with other jurisdictions.
But on the other hand, IFCs also collaborate more than most in the private sector appreciate. On many key issues involving the UK Government or the EU, the British IFCs (or at the least the CDs and OTs separately) work incredibly effectively together. This collaborative work should not be underestimated.
The key is that the CDs and OTs collaborate when faced with existential threats. In the next few years, a UK Labour government, an EU without the UK as a member and the US government, all constitute a threat to the survival of the British offshore world. In the face of these threats it is largely futile for the IFCs to strive to differentiate themselves from each other. The House of Commons debate over the Sanctions & Money Laundering Bill in May 2018 showed that while the UK Parliament differentiates between CDs and OTs, it does not differentiate within those groups. For instance, it sees, largely, no difference between Jersey and Guernsey or Cayman and BVI. The Dutch Government’s tax evasion blacklist of January 2019 shows no differentiation between any of the British IFCs at all.
The most important weapon for the IFCs to acquire in the face of such threats is power. The NGOs that are opposed to the IFCs will not change their opinions. Nor will the EU nations that are implacably opposed to zero rates of corporation tax. The only way to resist these threats is to be powerful enough to stand up to them. As the IFCs are small countries, the most obvious source of power is the protection of a major world economy. For the British IFCs, this means the UK. For this reason, the number one priority for the CDs and OTs is to persuade the UK that they add to the UK’s economic power and influence. And in return, that it is in the UK’s own self- interest to protect them.
If this fails, the prospects for the CDs and OTs are bleak. Their best hope lies in working together, diplomatically, to noisily resist the threats posed to their economic model and therefore their future.
The role of the private sector is also important. Those that rely on the British offshore world for their livelihood will need to stand up and be counted. They could also increase the funding of the two international industry bodies, STEP and the IFC Forum, to lobby and speak on their behalf. However, the most effective thing they can do is to persuade companies based in the UK, particularly London, to explain the value of the CDs and OTs to the UK Government. The UK needs to hear that message from companies based in the UK that pay UK tax and whose employees vote in UK elections.
IFCs should certainly work together on the broadest policy issues but each jurisdiction should retain the freedom to innovate and pursue its own genius. The Latin word for competition means ‘seeking together’. Financial innovation, just like innovation during the Industrial Revolution or in the birth of Silicon Valley, often means copying and learning from one's neighbours. Imitation is, after all, the highest form of flattery.
But the fact that IFCs are friendly competitors should not blind them to the fact that great and malignant forces despise and hate them and everything they stand for (yet which, once upon a time, in the ‘’First World’ used to be taken for granted, namely protection of private property, confidentiality and privacy in relation to all banking or legal matters).
It should now be apparent to every intelligent observer that virtually every promise made by the OECD since 1998 has been dishonoured. Every concession by IFCs has led to more demands. What was disavowed as intended by the OECD 20 years ago is now treated as taken and given.
But as in any cartel arrangement, eventually it will occur to at least one nation that the fewer the suppliers of needed services, the greater the profits to be made. The surrender of landlocked Switzerland, for example, followed by that of strategically isolated Singapore, has created a huge market vacuum waiting to be filled up by an innovative jurisdiction. Of course, such a jurisdiction must be immune to any serious threat of banking or diplomatic sanctions. Two obvious candidates which suggest themselves are Taiwan and Panama. Neither would be subject to sanctions by the United States were they to co-operate with that country in relation to terrorists, US criminals or US taxpayers. They could surrender the US market by signing up to FATCA etc. with the USA. However, neither jurisdiction has any reason to kowtow to any other countries. European countries would not wish their shipping held up in the Panama Canal for inspection nor would the United States wish to lose its largest aircraft carrier in the Pacific, blocking China's maritime expansion towards the west coast of the United States. Switzerland may be landlocked, but these two jurisdictions are not.
Speculating to the future, Britain would be well advised post-Brexit to look to its ancient predilections for liberty, declare itself as the premier offshore financial centre and slash taxes on labour, business, trading and financial activities by doing what Lloyd George and Winston Churchill wanted to do in 1909 – shift the tax base away from labour and capital onto the land values of the United Kingdom. Taxing UK land values (much of which is held by foreigners or foreign institutions), would enable large tax cuts for globally mobile financial activities which the UK will need to attract post Brexit.
Collaboration is useful and necessary for improving services, technology, state-of-the-art banking techniques and fintech development. Cooperation between IFCs is also essential for security, an increasingly complex technical and highly visible political issue. It is useful to have cooperation in developing common service standards, legal standards, ethical approaches, financial instruments, financial infrastructure, and strong and clear regulation to avoid systemic issues and instability.
Cooperation does not exclude competition; on the contrary, it is beneficial in attracting talent, fostering innovation, custom solutions and the improvement of services. Competition is unhealthy if it is merely for the enhancement of profits and volume. Cut-throat competition is to be avoided to stave off financial crises. Efficient financial intermediation is key, and competition serves it by discovering legitimate new opportunities, inventing financial instruments, attracting and educating talent, and improving service standards.
In a way, jurisdictional differentiation is a given. There are natural jurisdictions for certain clients, such as Switzerland and the UK for Europe, the UK for the US and Europe, Singapore for Asia, etc. Even in a digital and globalised age, geographical and, especially, cultural closeness are important.
Growing and increasingly diversified demand for financial services means that some IFCs can differentiate themselves with niche services suited to their natural client base. Differentiation is also advantageous for service standards, flexibility and efficiency of service, and the quality of the legal environment.
There is always a pull between centralisation and decentralisation. It is better to keep individual centres and develop specialisation with highly compatible financial infrastructure to be able to seamlessly link to other centres.
The task for all IFCs is to convince the public that they are useful for a productive end: pooling international resources to help finance productive and useful investments rather than speculative investments, money-laundering and shady deals. This is a PR job. Both PR and education are essential to inform both financial practitioners and the public at large of the useful function of IFCs and the potential advantages they can provide. Coordination and pooling of resources for distributing this message would be useful and in all IFCs’ interest.
Geopolitical shifts and changes will continue to challenge IFCs. The rise of Asia, the source and stage of important economic growth, will likely continue to present European and American IFCs with strategic problems.
As such, IFCs are inseparable from the economic health of the areas they wish to serve. If there is no economic development and healthy investment opportunities to channel international capital into, the IFC will either wither or be skewed towards unhealthy and speculative finance, which is bad for the future and reputation of all IFCS.
Supporting economic development and keeping pace with technical development (blockchain, AI, fintech solutions) while investing in research and cooperation in security will be the key to IFCs’ general health and competitiveness.
Competition and collaboration are not opposites and can readily coexist. Of course, different IFCs have different interests, but IFCs offer different value propositions and there is room for a wide range of jurisdictions. Harvard Business School Professor Michael Porter argued that companies must either differentiate or compete on cost. In today’s world, budget jurisdictions no longer have a place at the table. The cost of compliance with various regulatory regimes means only jurisdictions that offer real value can survive. Consider offshore insurance products – Bermuda, the Cayman Islands, Guernsey, Gibraltar, Ireland, the Isle of Man, and Malta have all carved out important, yet different, market niches for themselves in insurance. They target different markets, offer different products and regulatory regimes, and compete to develop the most advanced statutory frameworks and to lure the best service providers. Yet all of them share an interest in ensuring that there is a level playing field for competition in insurance and that regulatory competition among jurisdictions continues.
IFCs could have a bigger impact on policy debates if they worked together, although coordination need not go as far as pooling resources. I think the problem for IFCs is that they too often are playing defense and letting their opponents (whether NGOs or high-tax cartels like the OECD) set the agenda. Think where the debate over blacklisting might be today if, 10 years ago, several IFCs had worked together to set a research agenda on the issues that blacklists raise? If there was an existing, rich policy debate underway, with thoughtful analyses exploring issues like ‘what is a fair process for listing a jurisdiction on a blacklist?’ and ‘what procedures need to be in place for jurisdictions to contest a listing?’, we’d be unlikely to be reading headlines about the European Union making up blacklist procedures as it goes along. For too long IFCs have ceded the advantage in framing the issues to the advocates of high taxes at the OECD and assorted NGOs. As a result, they have found themselves stuck in a debate framed around nominal tax rates instead of focused on the value IFCs bring to the world economy. Jersey Finance did a superb job in reframing the debate with the report they commissioned from Capital Economics, Jersey’s Value to Britain (2nd ed. 2014). More IFCs need to commission similar reports and then collaborate on developing the broader vision of the value IFCs deliver.
Global finance has become multi-polarised with more and more IFCs springing up to rival traditional bastions of global finance. The space is becoming crowded. Offshore IFCs compete for market share not just inter se, but with traditional onshore IFCs. With increased competition and threats to offshore IFCs’ survival in the post Global Financial Crisis-era, it may no longer be survival of the toughest, but survival of the most nimble, i.e. those offshore IFCs which are agile enough to differentiate themselves from the competition but still engage in strategic collaboration with other IFCs. In this sense, collaboration may be the new competitive advantage for offshore IFCs.
Competition and cooperation are not mutually exclusive. Competition is healthy as it promotes efficiency and rewards success. Indeed, the essential elements of successful IFCs include those which possess strong macroeconomic fundamentals and political stability plus a skilled labour base to provide an enabling business environment. However, IFCs do not exist as silos and in an increasingly interconnected world, information-sharing and building linkages are key.
The most successful offshore IFCs are those which keep pace with the existing and emerging needs of their global clientele, place value on compliance and adherence to international best practices and standards and promote responsible financial innovation. On these fronts, collaboration among IFCs through information-sharing and regulatory collaboration could assist.
Differentiation is also still key to competitive advantage. For example, with the increased importance of technology to the global financial architecture, those IFCs which promote themselves as hubs for fintech and wider financial innovation will be better poised for attracting investment in growing sectors, such as artificial intelligence (AI) and blockchain and even green finance.
IFCs, both offshore and onshore, have already been collaborating to some extent, particularly in the technological sector. Abu Dhabi and Hong Kong have entered into a cooperation agreement to promote fintech.[i] Dubai IFC and Paris Europlace signed an updated MoU to promote information sharing, including on Fintech.[ii] It was also announced that regulators from 11 financial regulating bodies had joined together to create a Global Financial Innovation Network which would not only act as a network for regulators, but allow for policy dialogue and provide firms an environment to test cross-border solutions.[iii]
Many IFCs are small island States beset with limited financial resources and a weak global voice but faced with increasing regulatory and financial burdens. It is to their advantage to seek out areas for collaboration and strategic alignment. This cooperation could be region-specific, such as an Alliance or Network of Caribbean IFCs or global, such as an Alliance or Network of Offshore IFCs. For example, in 2018, the World Alliance of International Financial Centres (WAIFC) was formed by some of the world’s leading onshore financial centres with the aim of facilitating cooperation and sharing best practices.[iv]
Regardless of what means is used, some structured mechanism for collaboration among offshore IFCs could be beneficial by pooling resources and giving IFCs a greater voice. Take the example of public relations. Public relations for offshore IFCs are usually conducted by public investment promotion agencies, private sector industry associations, or both. There is scope for collaboration among IFCs at the political level in lobbying efforts and/or collaboration among IFCs’ investment promotion agencies to promote cross-border investment. Collaboration can also take place at the regulatory level through information sharing and policy dialogue. At the private sector level, IFCs’ industry associations can pool together in their lobby efforts, but also in their research and education initiatives