It is election day on Wednesday in Jersey and we have heard very little in this election about our major industry despite it providing jobs for a quarter of the working population, sustaining a high proportion of our economy, and providing more than half of all government revenues.
This isn't too surprising; most finance industry activity takes place off Island, unless you are directly involved it can seem like a distant and unfamiliar subject.
But what of the finance industry and its future. The financial crisis and the over extension of bank lending triggered a major retrenchment in Global Banking, with the Big Four UK banks alone losing almost 200,000 jobs.
Major banking groups in Jersey have fared much better but have still cut costs. We have seen job losses although nothing on the scale seen in major centres. Our strategic review work identified this risk some years ago, and we have focused our efforts on growing new markets and newer lines of business.
In addition, the new business and entrants that we developed over the last few years have turned the tide on employment numbers with a return to growth. It is true banking has continued to slim but jobs in other sectors, in particular high value asset management, are growing faster. Total employment in the industry rose to 12,510 jobs over the last 12 months, reversing several years of decline. This trend looks set to continue as we benefit from investment in the new growth markets with Asian and Middle Eastern investors increasingly using Jersey as an international structuring centre.
So what is the long term outlook for our Finance Industry and the Jersey Economy?
It is all too easy to get bound up in short-term headlines, electoral and market cycles – cycles that don’t persist for more than a few years, and in the process miss the big picture. Capital Economics in their 2013 report confirmed that Jersey is typical of small communities whose size and resources permit only a few substantive industries. The same report and work with McKinsey powerfully reinforced our conviction that demand for financial services will continue to grow. It will be driven by two of the most enduring and significant trends of the 20th and 21st centuries: globalisation and population growth
According to leading experts these two trends are likely to persist for decades, if not generations to come. Neither of these trends is connected to avoiding or evading domestic taxation. Both trends are being super charged through technology innovation, and greater access to education.
Growth in trade and population are the mega trends of our times; their impact is bigger and development faster than the industrial revolution, creating another 1.8bn consumers by 2050. Of course there will be bumps in the road, as with the recent sell off in emerging markets, but the enterprise, energy and aspiration of billions, many of them increasingly better educated under 25’s, will not be denied.
It was the industrial and technological revolution that allowed a divergence from the rule that a country’s economic output is broadly in line with the size of its population. But the West’s superiority in new technology and in higher education is ending. Instead of divergence we are seeing convergence. India and China will soon resume their place as the world's largest economies, a place they held for all but three hundred years of the last two millennia. And it’s not just the BRICs; 7 of the 10 fastest growing economies of the last few years have been African. World trade is growing.
Trade needs financial support, creating the need for financing and capital management. It’s called Moving Money. Wherever you get trade growth, you get new wealth that needs to be managed and protected. These trends will see global demand for infrastructure increase by over $50trn by the year 2030. That is three times the size of annual US output.
We are already seeing in Jersey the post crisis surge in new real estate and infrastructure funds. Pent up demand, trapped by the dam of political and regulatory uncertainty is being released. But the drivers of economic growth are not only in the new world; the old developed world is changing rapidly too. Yes, it has saddled itself with debt, debt that will take years to bring under control, but growth drivers are emerging. It is all too easy to forget how enormously wealthy the West is and the potential for huge business opportunity in home markets. Ageing infrastructure in the West, much of it built more than half a century ago is crying out for renewal, it will increasingly be funded through private investment sourced from Asia and the Middle East, creating employment and cross border capital flows.
Ageing populations too will be a spur to growth. Healthcare spending from private sources will climb in response to government’s failure to make good on social welfare promises. Keeping the wealthy healthy will be big business…. with an estimated $4trn dollar boost needed in the next decade. Just to put that in perspective, that is bigger than the GDP figure for all but the Chinese, US and German economies. Technology innovation will achieve as yet unimagined productivity gains.
So the march of globalisation and economic prosperity will resume. These mega trends will bring problems with them, problems of land and water shortages, volatility in commodity prices, and with fiscal stimulus inflating asset prices; a widening of social inequality.
Away from the social and economic issues, how many countries can you point to in the world today are free from geo political tensions? In just the last few decades we have seen 9/11, the war on terror, invasions of Iraq and Afghanistan, the Arab Spring, a civil war in Syria, significant armed conflicts in Africa, territorial water disputes between Japan and China, nuclear North Korea lurching from one unstable dictatorship to another, and most recently, armed intervention in the Crimea, disputes in Ukraine and the unwelcome emergence of ISIS.
If you have made significant new wealth in this uncertain world, one of the first things you want to do is to secure it. Nothing to do with tax, but everything to do with capital security, protecting what you have, and then passing that new found wealth safely to the next generation. In so many countries with a history of political and social turmoil the instinct to seek out a safe harbour is powerful and persistent.
It is important to relate these trends to Jersey and its finance industry. The work we did with McKinsey confirmed that centres that can package, administer, and invest international capital at a competitive cost, whilst maintaining tax transparency and integrity, will see increased demand. This capability appeals to both the developed and the developing world. It’s the reason why organisations as diverse as the Scandinavian Private Equity Industry and Asian Sovereign wealth funds both structure through Jersey.
The creation of significant amounts of new wealth around the world will increase the demand for safe harbours. Research undertaken by McKinsey estimated that HNW household wealth would increase in value by around $15trn by the end of 2016. According to Credit Suisse, Global Wealth is now $241trn up 68% since 2003. Jersey will benefit from the upside in the global economy because it has the competitive capabilities that investors are looking for.
Some of these capabilities take decades to build and are difficult to replicate. IFCs compete on a range of attributes; the business environment, financial market infrastructure, sound regulation, the rule of law, human capital, connectivity and critical mass. Measured against these criteria our inherent strengths have enduring appeal.
Of course we have challenges and issues we must address, and of course we have been affected by the global slowdown. Recession hit western governments keen to collect more tax have propelled tax evasion and abusive tax schemes into the centre of the political agenda. Jersey is occasionally drawn into such controversies, usually fired up by the media, and inaccurately branded as a tax haven. But we have made fantastic progress in countering this, not least through the Capital Economics study;
Our role in capital flows and cross border investments is now much more widely understood and appreciated. Also helpful was the recognition that Jersey and the other Crown Dependencies obtained from UK ministers, led by the British Prime Minister. He stressed in Parliament that we deserved support for the steps we have taken to promote tax transparency and integrity. Angel Gurria, The Secretary General of the Organisation for Economic Co-operation and Development (OECD) agrees. He has also praised Jersey’s efforts in tackling tax evasion. However, more education is needed, especially in Continental Europe.
The latest OECD proposal for a single international standard for automatic exchange of tax information should be embraced, since these reforms are a platform for mobilising money transparently, and allowing greater global investment, which we strongly welcome.
A recent survey of our members indicates that the work already done in reducing costs, and in growing new markets and capabilities is paying off. We have improved speed to market, invested in overseas distribution and developed new products. By way of example, approaching 300 foundations have now been formed, one third supporting philanthropic purposes, and many of the schemes have been written for Middle East and Asian clients. Our funds volumes have scaled their pre-crisis peak with new companies and structures being formed at the fastest rate since 2008. Our entry into growth markets has uncovered new sources of business and our traditional strengths and proximity to Europe are seeing increased flows of capital attracted from Asia and the Middle East.
What do we need as an industry to sustain recovery and embed success in the years to come?
Firstly we need continuing political and fiscal stability: a government that understands we operate in a highly competitive market for mobile business; a government prepared to invest and to keep costs low; a government that remembers we are a low tax centre, trading off our knowledge; a government that avoids red tape and sustains a business friendly and welcoming environment; a government that backs one of the best governed financial centres on the planet. It is important to be clear that any further increases in the tax burden or business costs will seriously undermine our competitiveness and our ability to capture our share of the global recovery.
We need an employment market that grows its own highly skilled talent, a workforce that is multi-cultural and global in its outlook. We need a population policy that permits, in appropriate circumstances, the importation of high value skilled workers from elsewhere to fill skills shortages; the best way incidentally of achieving measured population growth within plan. We need a legal and regulatory environment that is sound and progressive, that delivers certainty, and that is appropriate and proportionate. Timely and fair enforcement of financial regulation is an essential component of investor protection, contributing to market confidence and financial stability. It can be a powerful differentiator in attracting investment. The ideal regulatory framework should be based on widely accepted global standards. A non-prescriptive approach striking a balance between investor protection, financial stability, and fostering financial innovation that brings greater value to the investor; this is the regulatory equilibrium that all stakeholders have an interest in delivering.
We need more and better infrastructure. The time to build the waterfront development was in the slow years, stimulating the economy and bringing 'A' class capacity on stream. As it is, we are years off the pace with demand picking up and little by way of suitable supply currently available. A recognisable financial quarter clustered around the Jersey International Finance Centre ‘JIFC’ will be a fantastic asset. We need secure energy supplies, reliable data connectivity and ample capacity, we need frequent air services, including strong international hub connections, and a stronger tourism industry can only help in this respect. We need an unrelenting focus on technology, digital security, web based communications, remote working, service delivery across the globe, all with strong connectivity to global payments and e commerce. Digital Jersey has a key role to play here.
We need a clear focus on skills development tailored to the needs of a fast moving industry, right now the hot spot is real estate administrators and accountants, capable of managing complex financial reporting. We need strong international relationships where we are respected as a transparent champion of responsible capitalism, an efficient economic accelerator, Moving Money, supporting jobs and growth around the globe. We need a climate that fosters innovation, an enterprise economy.
We are committed to deliver this programme. Some aspects are in place, some are underway and being worked on, some are still aspirational. We have no fewer than 110 people on implementation working groups, looking at how we can deliver the nine growth initiatives under the IFC strategic development plan.
The Jersey finance industry serves the needs of the real economy and real people, it is not a synthetic activity that operates divorced from the real world. It is based on strong foundations and substantive client needs, it has cluster strength, and we are the largest of the British CDs and OTs in workforce terms. And we are growing; in a Jersey Finance survey our members confirm they plan to create 900 new jobs over the next 5 years targeting a minimum of 80% on Island recruitment. And yet our industry comprises 1:4 Island jobs, leaving 75% of employment opportunity for other career choices. It needs in relative terms few people to generate spend of more than a £1m per day on local businesses, it pays for more than half of our public services and contributes a huge amount to the charitable sector. It can and will endure if we continue to invest and aspire to being best in class.
Our license to operate depends on delivering social good as well as profits. Finance is still the best prospect Jersey has, now, and in the future; the best prospect for sustainable employment, for careers for our young people, for navigating the financial challenges of an ageing population, the best prospect of preserving and improving the natural and built environment of this beautiful island. It is the best chance too of maintaining population at a sustainable level, whilst being able to afford all of the things that make Jersey special.
We are just days away from an election and if I can grasp the opportunity to communicate a simple message to the wider business community, to the voting public, and to prospective candidates, it is this: Value your finance industry, it is one of Jersey's greatest assets and the principal source of its prosperity.