Succeeding in an Uncertain World: 2012 and Beyond

We recently hosted our annual Jersey Finance member’s lunch, where each year we review the past twelve months and consider the one ahead of us. 2011 was a milestone year for the finance industry in Jersey, as we marked 50 years of heritage for the island’s finance industry.

We recently hosted our annual Jersey Finance member’s lunch, where each year we review the past twelve months and consider the one ahead of us.  2011 was a milestone year for the finance industry in Jersey, as we marked 50 years of heritage for the island’s finance industry.  Last year also marked the 10th anniversary of Jersey Finance and saw the continuing development of the organisation with the opening of a representative office in Abu Dhabi, covering the GCC region, and the addition of a representation team in India.

Jersey also saw the opening of an office in Brussels in 2011, a joint venture between the Governments of Jersey and Guernsey with the remit to promote the islands’ interests in Europe.  This is already having a positive effect on Jersey’s profile in Europe and there is now a wider appreciation of our position as a cooperative, well-regulated international finance centre.

In 2011, Jersey continued to sign Tax Information Exchange Agreements, the most recent being with Japan and India, and many more in the pipeline. The Indian TIEA was an important development with regard to Jersey’s progress in establishing closer commercial ties with the country and shows that there is mutual recognition about the quality of the standards of compliance and co-operation between regulators and tax authorities.

Another core aim in 2011 was to maintain Jersey’s reputation as a leading jurisdiction. To this end, we retained our position as top offshore centre in the Global Financial Centres Index and furthermore they recognised Jersey as one of the top ten centres likely to grow in significance over the next few years alongside larger centres such as Hong Kong, Shanghai and Beijing.   We also won ‘Best IFC’ at the international Fund and Product Awards, as well as being voted in the Top 5 Locations by Private Banking and Private Wealth Management.

Our 2011 statistics also reflected positive growth, with banking deposits up by £6bn, Fund levels up by £13bn, Investments up by £1.8bn and 1,845 new companies being formed.  Additionally, we saw 17 new financial services businesses relocate to Jersey and employment in the finance sector headcount increased.  So while things have been tough, after the worst global slowdown for a century, we are seeing improvements and we are also now employing more people in our industry with 140 new jobs created in the first 6 months of 2011.

We also saw some very significant progress in terms of Jersey’s international aims, when in September 2011, the EU Code of Conduct on Business Taxation Group accepted Jersey’s proposal to end shareholder taxation through attribution of profits or deemed dividends that would remove the harmful effects of the regime. This decision was then ratified by ECOFIN in December, which was a very welcome and positive development for Jersey. We have always sought to maintain Jersey’s tax neutral status and the EU’s decision is good news for all sectors of the finance industry as we begin 2012 on a confident and strong footing.  

So what lies ahead for Jersey in 2012?  The bad news, in terms of the Global Outlook, is that the IMF has revised down growth expectations even further due to the issues in the Eurozone, where the lack of persuasive and credible plans is causing ongoing fear in the markets. This makes it even more important for Jersey to focus its efforts in emerging markets that do have growth forecasted, especially when you consider the on-going lag of national debt – UK borrowing for example is now up above £1trillion for the first time. 

To establish what Jersey should be doing in response to this situation, we have to establish what next?  A recent publication by McKinsey outlined four different Global Economic Scenarios:

  • The developed markets regain solid growth trajectories and the world is rebalanced.
  • The emerging markets get derailed and cannot sustain growth.
  • We see the decade of the Dragon and the Tiger, with the developed world continuing to stall due to debt and the emerging markets continuing to gain momentum.
  • Both the developed and emerging markets stall on the back of indebtedness, with the emerging markets ‘dragged down’.

Many experts believe that the most likely outcome is scenario three.  In Europe they are stumbling toward a solution, with modest growth predicted for next year and the emerging markets are looking stable in their prospects.  For Jersey’s finance industry, this ultimately translates into five key objectives.  In 2012 and beyond we need to:

  • Fight harder to get business in Europe in a flat-lined, mature market.  In Europe we will have to increase our market share at the expense of competitors if we are to grow.
  • Capture opportunity in markets with growth – i.e. the BRICs.
  • Spend more time working to embed and extend our overseas representation more widely.
  • Improve our existing offering, such as company law, trust law, and launch new products, to respond quickly as we see new opportunities emerge.
  • Continue to drive inward investment – there is a window of opportunity right now to do this.

There are significant challenges we will have to face to achieve these aims.  If Lehman Brothers going to the wall was the global financial earthquake, we are now facing the resulting regulatory tsunami.  These are extraordinary times; in over 30 years of working in financial services, I cannot recollect such a quantum of regulation coming our way. It is going to be a huge task to meet international standards, yet remain progressive and ensure we make the most of the opportunities that these changes may bring.

For example, ICB (Vickers) may interrupt our up-streaming model and deposit flows, but could also change our banking model, which currently only allows banks listing in the global 500 to set-up in Jersey, because historically they were considered systemically too important to fail.  If we now find ourselves in a world were banks are no longer too big to fail, our regulation will need to change to take advantage of this.

Another good example is the Alternative Investment Fund Managers Directive (AIFMD), which in its earliest form would have been very negative.  Now that its terms have improved, we need to quickly establish out credentials as a third country and use this to increase our private placement offering.

To navigate our way through these challenges and achieve these aims, we need to work to further develop our international relationships with bodies like the G20, the Financial Stability Board, FATF, the OECD, the IMF and HM Treasury.  We need to clearly demonstrate that we are an economic friend, and not a source of tax leakage.

A focus on international relations will be a key priority during 2012.  We are an export industry; we need market access, treaties, and alignment.  We need support from Jersey’s government to build constructive dialogues with the UK Coalition government and key figures in Brussels, Europe and China.

We also need to deal with our few, but very noisy detractors.   We cannot be complacent in defending Jersey’s reputation – we need to rebut false claims and ensure we are conducting our own credible research. 

While we undoubtedly have some difficult work ahead of us, I see 2012 as a time when we can significantly grow our ability to innovate.   The mixture of our own stability at home, both financially and politically, and the new demands being created by the changing global markets mean we have an opportunity to become what I call an ‘Innovation Engine’.

New markets like South Africa (which has now joined the BRICs as a high growth economy) and Brazil, where we now have treaties, have significant potential for us to divers

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