Leading International Finance Centres (IFCs) are adept at surmounting challenges and they have indeed shown their resilience during this unprecedented global pandemic.
But as the pace of change in financial services accelerates, a drive that has been further shaken up by the ramifications of the virus on the way we work, are IFCs prepared and what response is required to ensure they have a future by the end of the decade?
Top of the priority list must be the digital revolution that is cutting a swathe through many industries. This trend will inevitably alter working practices, perhaps in ways we have not even thought of to date. What is certain is that over the coming decade, we will see a radical change in the way financial services are delivered and transactions are executed, led by the drive toward digital solutions. Many have noted that the pandemic has been a catalyst in that it has forced organisations to appraise their working practices and crank up their investment in technology at a faster pace than they would otherwise have envisaged.
More sophisticated systems will be in place for digital signatories and validation of transactions, whilst a rapidly emerging data-driven financial services environment will require IFCs to be ambitious and agile in their adoption of innovative technologies such as Artificial Intelligence (AI).
With numbers of digital transactions growing at an estimated 12.7 per cent annually, and with an estimated 60 per cent of global GDP being digitised by 2022, now is the time for that foresight from centres if they want to remain at the cutting edge of solutions. Digital offers IFCs the opportunity to explore new areas. They can build on their traditional strengths in High Net Worth (HNW) and institutional markets, tapping into a broader, more retail market to give them access to new international opportunities. IFCs such as the BVI, Cayman, Guernsey and Jersey, for example, have already appreciated this and have embedded a digital-first approach at a jurisdictional level, creating sandbox environments geared to nurturing start-ups and venture projects.
As part of that revolution, the real-time collaboration will become far more commonplace. Thus, I would expect ‘magic circle’ law firms and their IFC counterparts to work together on joint portals to provide solutions and to fulfil documentation needs, avoiding any unnecessary delays whilst paperwork passes between offices. Firms will transform the speed and precision of information flows and data rooms will be easily accessible by clients in real-time.
Regulators will surely take advantage of this leap in technical innovation, setting information protocols that standardise data fields so they can more swiftly access critical information. Immediate data access will enable regulators to anticipate problem areas so much earlier. Digital investment will also be required to remain cost-effective because clients will apply price pressure and expect even better service at a lower price point.
Analysis of the current picture is precise. For example, a report in 2020 from PwC in the Channel Islands warned that 30 per cent of jobs will be at risk from automation and AI in Guernsey and Jersey unless governments commit educational resources to a new digital skills programme for the workforce. However, provided that investment is made, the jurisdictions will be in a position ‘to attract new business, improve the quality and value of the work and ultimately bolster the long term competitiveness and prosperity of the Islands’.
Global studies follow the same pattern. Research by McKinsey estimates that up to 375 million workers may need to switch occupational categories by 2030 to meet the drive to automation – equivalent to 14 per cent of all workers. IFCs cannot avoid this emphasis on digital engagement because they are service-led and technology-enabled and therefore disproportionately affected by technical innovation.
The superior IFCs are good at this evolutionary game. If we look at their origins and where we are today, changes have already been radical with centres adapting to meet both the shifting conditions of global financial services and the pressures applied by governments and regulatory bodies in how business is done.
In the 1960s, IFCs emerged as politically and economically stable locations which were able to deliver banking services primarily to expatriates and HNWs from an attractive tax neutral environment. Over the decades, with the influx of leading banks and asset managers and the build-up in expertise provided by local law practices and professional service firms, the IFCs became leading centres for trusts and other private wealth structures, supported by appropriate legislation. By the new millennium, the funds market had mushroomed and IFCs and jurisdictions equipped with the substantial expertise of lawyers and administrators saw the potential for broadening their offering especially in the Alternatives space.
In this same period, centres replaced lighter-touch regulation, the buzzword when these centres first flourished and replaced it with a requirement for far more robust codes and regulatory frameworks. In tandem, a drive to proactively engage with international organisations such as the OECD, the Financial Action Task Force (FATF), and the World Bank emerged. IFCs gave full co-operation, supporting a host of global measures designed to crack down on financial crime and money laundering and to exchange information about clients with tax authorities worldwide more easily.
When considered from an external perspective, it has been a remarkable transformation and testament to the ability of governments, regulators, and industry in the leading centres to consult effectively and consistently to bring about the necessary changes, while remaining competitive, retaining an appropriate level of confidentiality and meeting client demands.
IFCs Of The Future
The successful IFCs of the future will adopt the same characteristics that have always been a factor in their success, adapting with speed to the environment they serve.
By 2030 there are likely to be fewer IFCs, but those remaining will be stronger players within the global cross border trade and investment market. They will demonstrate a global reach, never envisaged when they first emerged and will need to stay invested in world-class connectivity.
Bolstered by digital enhancements, they will have a workforce sharpened by training in the required digital skills. Innovation will still be crucial and so will that unique infrastructure, that network of experienced professionals delivering focused client solutions effectively and seamlessly to an ever-growing and diverse worldwide client base. The phrase I employ is that jurisdictions will need to be big enough to matter, but small enough to be agile.
The pandemic has also sharpened the focus on Environmental, Social and Governance (ESG) policies with sustainable finance an even more significant part of the mainstream. Figures show that even in 2020, ESG investment is worth around US$30 trillion and accounts for a quarter of all professionally managed assets; the direction of travel is clear to see. Although IFCs have in place specific frameworks to support philanthropic, impact, and socially responsible and sustainable investment, by the next decade they will need to work harder to stay at the forefront and to remain influential in this space. They will need to find ways to communicate and illustrate the positive and tangible impact of what they do both for society and for the environment to meet the expectations of clients.
While regulatory challenges remain, IFCs have the potential to capitalise on their regulatory competence and best practice models. Few can claim to have such expertise as the larger offshore IFCs in collaborating with the global standard setters. And they can leverage this advantage in the future by demonstrating how other jurisdictions can thrive, whilst continuing to bolster their regulatory armoury to meet international standards. Future tax initiatives will always be a challenge, but IFCs have weathered these storms in the past and they can do so again, provided they appreciate that scrutiny will continue and tax systems may need to be modified to meet international demands.
The good news is that, by and large, the leading IFCs’ adherence to high regulatory standards, is acknowledged consistently now by the global standard setters. Their willingness to embrace greater transparency through their commitment to a level playing field in matters such as public corporate beneficial ownership registers, in step with the European Union, has given them a more substantial platform in which to engage in future debates on taxation policies and the fight against financial crime. That everyone should be paying a fair amount of tax has become the unspoken consensus and will remain a feature of the economic landscape and fiscal narrative in the coming years as COVID-induced financial pressures increase. IFCs will need to find ways of supporting that drive for a fairer society, whilst also meeting the ESG ambitions of the next generation of wealth creators.
Meeting A Demand
It’s a tough and challenging time and by 2030, I can’t envisage it will be any different. In the last 15 years the world has endured a global financial crisis which had untold ramifications for financial services and a global pandemic that has caused massive disruption and sent a seismic shockwave through world economies. The strongest IFCs, which emerged effectively from the crisis in 2008, will be able to do so again and position themselves for future challenges and opportunities. Those lacking those attributes outlined may struggle in the years ahead, reach a plateau and decline. But the full-service centres, with the ability to collaborate across multi jurisdictions, who continue to invest in global connectivity and their digital future underpinned by robust regulation will remain a vital conduit for institutional investors and private clients now and in the future.
Furthermore, governments will be under tremendous pressure in the years ahead to deliver on public services and to revitalise their economies. Having borrowed at such high levels and with public sector finances strained everywhere, they will be looking for partnerships with the private sector to help deliver on new hospitals, schools, climate change initiatives and other societal demands from their citizens.
Without free-flowing global investment, countries are likely to fall short of their economic and social aspirations. IFCs’ unique selling point in the institutional marketplace – their structuring capabilities that ease the channelling of funds across borders through a stable, secure and appropriately regulated environment – will remain a central proposition that can be delivered well into the next decade and beyond.
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is a non-executive director to a select number of Family Office, Private Capital, Banking and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also a Board member of Apex FS (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.