While Switzerland remains their biggest competitor, the Crown Dependencies - with the right expertise and forethought - still have a bright future ahead of them in offshore banking
It is fair to say that the offshore banking industry is on the verge of entering a new phase of evolution in the way it operates. Tax harmonisation, and the emergence of new jurisdictional competition means that life is changing in this arena and if the issues are not currently addressed, this new evolution is going to be painfully slow and could see the demise of much of the business currently undertaken.
Taking Guernsey as an example: there is currently £70bn deposited in banks on the island (source: www.guernseyfinance.com, March 2005). Perhaps other than currency fluctuations, this figure is not increasing in any significant way, and so if the pie remains the same what does the offshore banking sector need to do to ensure its future? Some would suggest cost cutting is the way forward; others that ensuring across-the-board expertise will bring business. However as the type of client is changing, should it not be that the sector also changes?
In the coming years, there will be a significant fall off in the number of mass affluent clients looking for offshore banking. Tax harmonisation across Europe means that it will become no more attractive for this sector of the market to bank offshore than onshore. The future lies with securing deposits from high net worth individuals, UK resident non-domiciliaries, and corporate and institutional business.
In terms of institutional investors, the share of money in the market from petro-revenue is extraordinary. Much of the Middle Eastern money expected was based on a price per barrel of oil of $45, but that price is now $65 which means the region is flush with cash and investors are looking where to deposit funds. The region itself remains politically unstable, and the focus continues to stay with the traditional offshore jurisdictions.
While some would argue Switzerland will be the primary beneficiary of substantial funds, there are opportunities for Guernsey and Jersey offshore banks to benefit.
However, with much of the tax advantages being eroded, Jersey, Guernsey and the Isle of Man need to consider broad specialisations to ensure future growth. In Guernsey, the growth area is in fund management. Already Guernsey is seeing, through its decision to focus on this area of expertise, an increase in the amount of corporate business coming into the island. A number of companies, including ourselves, have embarked on innovative initiatives to fully exploit the potential in fund administration and management.
Arguably, many considering offshore banking see Guernsey, Jersey and the Isle of Man as equal players. However, specialisations within these centres are emerging. For example, Guernsey with its funds administration, and its increasing expertise in captive insurance markets and protected cell companies. The Isle of Man has been known and will continue to be home to the insurance and life assurance sectors while Jersey remains dominant within the crown dependencies for private client work and trust business.
Jersey has the advantage of being the apparent offshore banking jurisdiction of choice for the UK, and Guernsey has had to differentiate and work harder to attract business. However, in the next few years Jersey may struggle as traditional business begins to look for more than a traditional offshore service.
The islands will each need to continue to accentuate their specialist areas if they are to survive.
the Tax challenge
The issue concentrating the minds of the crown dependency jurisdictions is the zero-10, zero-20 tax issue. With each of the islands having to decide whether to impose zero to 10 corporate tax or zero to 20, and the level of harmonisation of tax across the jurisdictions that the decision will bring, many are beginning to think about what will be the next big challenge.
It is common knowledge that each of these islands rely heavily on the income generated by the financial services sector. With a relatively simplistic tax structure how are the islands going to differentiate themselves in this sector and what other sectors are they investigating to ensure that income generation at worst remains constant? The obvious areas to consider are intellectual property, tourism and further specialisation within the financial services industry.
With the mass affluent market being less inclined to bank offshore for tax reasons, there will be a corresponding lack of impetus to attract this type of business from the major banks. The focus will shift to attracting those individuals and institutions looking at asset protection and careful structuring for the future. Combined with a more international, mobile workforce, it is those jurisdictions that have the correct planning and expertise in place that will win this business.
The future for the crown dependencies' offshore banking industries will see few bigger players in each area as consolidation continues (for example, NatWest with RBSI, Bank of Bermuda with HSBC). As there is very little new money to be sought it will be a question of who gets the biggest share of the income available. If we continue on the same curve - which has peaked and is flattening out - it is certain that only those that continue to consistently perform will succeed.
However, how does each jurisdiction take advantage of the changing needs of the client, and exploit what growth opportunities present themselves? It is well known that offshore banking does not operate in a bubble in the crown dependency jurisdictions. The islands need to continue to concentrate on support services and facilities if they are to react quickly and efficiently to potential growth. Consideration needs to be given to the skill sets appropriate for the future. Do the islands have suitably qualified individuals to win business?
Taking Guernsey as an example: if intellectual property is considered an area where growth can be achieved then it is the island doing the right things to attract the right people. For example, it is making it tax advantageous to move to the island, providing the right training and education on the island and ensuring that schooling, lifestyle and career progression are available.
Despite many of the predictions, the future remains bright for those with the expertise and forethought to anticipate the future. The main competition for offshore banking in the crown dependencies remains Switzerland. If Switzerland addresses its trust regulations and builds a viable foundation in which to attract this institutional type of business then the other jurisdictions will have a fight on their hands. It is up to us as islands and businesses to ensure the issues are recognised and we remain in the game.
Mass affluent investors are moving away from offshore banking as the traditional tax differentiation with onshore jurisdictions gets less and less.
In order for the Crown Dependencies to remain competitive they will have to become specialists.
Some specialisation is already clear: the Isle of Man dominates the life industry; Guernsey has a fund admin and captive insurance niche and Jersey has a reputation for private client and trust work.
Head of UK intermediary distribution
‘Promising lead’ or ‘Back to the lab’?
PA360 2019 revisited
Complaints triple in past year
Our weekly heads-up for advisers