The Isle of Man's financial services sector is prospering, but its resolve was tested with the efforts of the OECD to 'name and shame' unfair tax regimes. Dylan Emery takes a look at the island's financial services
The Isle of Man recently won the award for 'Best International Financial Centre' at the International Investment Offshore Fund and Product Awards. The awards recognises the work of the Isle of Man's financial services sector has achieved.
The economy of the Isle of Man is booming, thanks in large part to the success of the financial services industry on the island. The financial services sector is the largest in the economy accounting for 41%. Professional services are next, representing a 15% share. Manufacturing comes in at 9%. Insurance and banking products have traditionally been the mainstay of the finance sector, but fund administration and custody have equally helped push the unemployment figures down to effectively nothing (in fact, around 0.6% of the working population).
There are more than 200 insurance companies on the island, 62 banks, 67 accountancy firms, five building societies and seven stockbrokers.
This poses a problem for companies wishing to expand their business. If a highly qualified staff member is offered a better salary elsewhere on the island, it can be expensive, time consuming and difficult to find a replacement. Generally, it is easier to acquiesce to the demand for higher payment than find someone with equivalent skills either on the island (by poaching from a competitor) or persuading an off-islander to move there.
However, the Isle of Man, unlike nearby competitor Jersey, has no restrictions on UK citizens going to work there. The only limitation is set by the Employee Act, which requires that jobs be offered to locals first. This law is something of an anachronism however, and does not pose serious problems for employers, as often they will need to search further afield for the specific skills needed for the job.
When it comes to attracting such talent, Stephen Beevers, head of business development for the international services division of the Isle of Man, says: 'The weakness, if there is one, is that house prices have risen a great deal.'
The positive result of this success for the island is that GDP growth over 1999 and 2000 has been 20%. GDP per capita outstripped that of the UK for the first time in Q1 2001.
More importantly for fund management companies, is that in the latest budget, tax for fund managers was reduced to zero. Of interest to employers eager to attract staff, is the top rate of income tax that was cut from 20% to 18%, and businesses with profits up to £500,000 are put in a lower tax bracket. As part of its long-term taxation strategy, the Tynwald (the parliament) is aiming for a 10% rate for business profits by 2003.
Anti-money laundering efforts from the US were met with some horror from the offshore world when the US Inland Revenue Service introduced the notion of Qualified Intermediary Status (QIS). This system threatens a withholding tax on certain clients of financial services companies that deal in US securities. However, in October 2000, the IRS reviewed the 'Know Your Client' regulations of the Isle of Man and approved the jurisdiction, allowing companies based there to apply for QIS.
The OECD's efforts to put pressure on offshore jurisdictions to change ring-fenced, 'unfair' tax regimes led the Isle of Man into intense negotiations to avoid being blacklisted. The negotiations, we are assured, have been successful. However, the attitude of the government is that it will not be in the vanguard of developments in thorny areas such as information exchange and exempt companies.
The story of the fund industry on the island over the last two years has been one of recovery. It took a severe blow when Global Asset Management (GAM) relocated all of its funds to Dublin. Being the player representing by far the largest proportion of assets under management, the industry looked as though it might not recover. The introduction of the Professional Investor Fund (PIF), aimed at high net worth individuals and institutions, received little interest from fund sponsors and did not reinvigorate the industry as hoped. By far the most exciting development in recent times, therefore, has been the introduction of the Experienced Investor Fund (EIF), a far more flexible product that allows complete investment freedom, a low ($25,000) minimum and no need for pre-authorisation. In fact, a fund sponsor has 14 days to apply for authorisation after the offering documents have been prepared.
The Financial Supervision Commission (FSC) has spent considerable resources marketing the EIF around the world and it is ironic that the interest sparked by this attractive new fund structure has been matched by a rediscovery of the PIF ' once thought dead in the water. The PIF has a much higher minimum investment and it seems that this makes it a more marketable structure to high level investors who are not interested in being sold a retail product.
Beevers explains: 'It is a strange thing psychologically but it does seem to work. The policy direction with the EIF was that we realised alternative investments were becoming popular. People were realising that the old stories ' LTCM and so on ' were not representative of the industry as a whole. And, if you are going to have a fund that is not for widows and orphans then it matters that it is properly labelled.'
The island has attempted to remain abreast of the pack on internet sales and client information. Indeed, Manx Telecom was in competition with Japan for being the first provider of G3 'third generation' mobile technology to the islanders. This is reflected by the recent appointment of an e-commerce 'Tsar', Tim Craine. This was a post created following the Charteris Report, commissioned to indicate how the island could take advantage of the boom in e-commerce.
Another major offshore issue of 2000 was the activities of the Financial Action Task Force, which was attempting to put pressure on jurisdictions that did not meet 'international standards' of anti-money laundering legislation. Both the FATF and the OECD has the potential to cause significant damage to the finance industries of non-compliant countries, if they can persuade their member countries to penalise companies that deal in those countries.
However, recent remarks by President Bush have indicated that he is less keen to interfere in what might be regarded as healthy regulatory and tax competition between countries. Until he makes his position definite on this subject, it is unclear if bodies like the OECD have had their teeth pulled.
The FSC tends to be a 'hands off' body. Intervention is rare and when it does occur, it will tend to put pressure on the locally-based administrators, rather than the managers, who may not be on the island. This is a pragmatic approach.
Beevers says: 'The FSC is more likely to breathe down the necks of the administrators here, because that is where its leverage is.'
This suits the situation in which fund administrators have to be on the island and tend to be third party.
He explains: 'They can go through the process of setting up their own management and administration company but then they still need a license from the FSC to do that. If they are a London-based manager, for example, they will probably want to outsource.'
In any case, most managers are really only interested in the trading side of the business, not the administration side.
Beevers concludes: 'If some-one offers a turnkey arrangement, why not take it?'
The financial services industry on the Isle of Man is booming, accounting for 41% of the economy.
The Isle of Man has no restrictions on UK citizens working on the island.
GDP growth over 1999 and 2000 has been 20%.
Tax for fund managers was reduced to zero in the latest budget.
The OECD's anti-money laundering efforts led the Isle of Man into intense negotiations to avoid being blacklisted.
President Bush is not keen to interfere in regulation.
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