Chairman: John Willman, former UK Business Editor of the Financial Times
Geoff Cook: Chief Executive of Jersey Finance
John Harris: Director General of the Jersey Financial Services Commission
Richard Corrigan: Chief Officer of the States of Jersey’s financial services, digital and competition teams
Felicia de Laat: Partner, Mourant Ozannes LP
Jo Gorrod: Client Services Director of Equiom Jersey
Richard Ingle: Chief Executive of Standard Chartered Bank Jersey
Steve Meiklejohn: Partner of Ogier
John Riva: Head of Tax at KPMG JerseyAuthor
Meanwhile, negotiations following the UK vote for Brexit have at last begun to progress, though with little clarity so far on the likely outcome.
In this Roundtable Discussion, I want to examine how Jersey has responded to the events of the last 12 months, discuss Jersey’s international reputation and outline developments in the banking, funds and private wealth sectors. But I’d like to start by asking each of you how 2017 was for Jersey’s finance industry from your perspective. Please start us off, Felicia.
Felicia de Laat: Jersey funds had a really busy year. Fund numbers and capital raised both increased. There were various headwinds though, such as the impact of the Brexit negotiations. The Paradise Papers provided annoying background noise towards the end of the year but it didn’t seem to affect the launch of funds that we were working on, or make people change their choice to use Jersey. And it was still a very good year for funds, despite the headwinds.
Richard Ingle: Banks have been steadily rebuilding their balance sheets, deleveraging and refocusing since the financial crisis and interest rates are starting to creep up, which is always welcome for banks.
Central banks are starting to unwind quantitative easing and international regulatory initiatives are being implemented – some raising interesting questions. For example, sharing client data with various tax authorities around the world must be balanced against protecting client data and increasing cyber security. But banks have spent a lot of time learning from their past mistakes, particularly around conduct, so I see 2017 as a turning point which has been reflected in some encouraging bank results.
Richard Corrigan: From a government standpoint, it was good to see some of our previous efforts bearing fruit in 2017. So the work to establish Jersey as a credible global funds jurisdiction was marked early in the year with the arrival of Softbank’s new Vision Fund, the world’s largest fund structure and its capital raising.
The introduction of the Jersey Private Fund was the result of great work between the industry, the regulator and the Government to launch something forward-thinking with an appropriate level of regulation for that type of fund structure, which doesn’t stop institutional investors raising and committing their capital.
We were very pleased later in 2017 to receive the compliant rating from the OECD Global Forum peer review process, making us one of a handful of jurisdictions to have that rating. It’s very important for Jersey that we can demonstrate a responsible approach to collecting information and sharing it appropriately with competent authorities around the world.
Steve Meiklejohn: I don’t want to sound complacent or smug but I think we’ve had a good run in the private wealth sector over a number of years, notwithstanding the various headwinds such as the Paradise Papers. We rely for a lot of our work on the London intermediary market and elsewhere, and Jersey continues to be a jurisdiction of choice. Existing clients are happily restructuring in a way that will see structures administered in Jersey for some years to come. And there is still new business coming in from all parts of the globe, the Middle East in particular.
We obviously didn’t want the Paradise Papers story. But if we look back to the Panama Papers and the various initiatives after their publication, it’s interesting that after a week or two of extreme publicity there haven’t been a huge number of new initiatives to follow. And, of course, why should there have been – there wasn’t an awful lot that was bad in what came out from Appleby, a very well-regarded firm.
John Riva: 2017 was an incredibly busy year from an international tax perspective. We successfully implemented the Common Reporting Standard and sent out all the reports in June. We implemented country-by-country reporting and sent out the first reports at the end of the year.
The Taxes Office exchanged all their rulings in accordance with BEPS Action 5, effectively discharging all Jersey’s obligations under the inclusive framework for BEPS – making us one of the only jurisdictions out of more than 100 that has actually done that. At the end of the year, the EU agreed that we were a cooperative jurisdiction for tax matters (though there are still some issues to resolve in relation to the substance tests).
Jo Gorrod: In terms of administration and servicing in the fiduciary sector, the employment numbers look quite robust. We have to acknowledge that there are lots of external threats, either from the regulatory side or from continuing changes on the tax side but Jersey has positioned itself in a competitive position compared to other jurisdictions. And we’re seeing enquiries from people who want to re-domicile in Jersey because they had relationships in jurisdictions that are not quite so well-respected, which makes it harder to do business. Seeing them come to Jersey is very positive from our point of view.
John Harris: I agree with everything that has been said – 2017 was a good year on the whole. As the regulator, the JFSC sees a bit of everything and the glass is certainly more than half full in terms of industry development, new lines of business and the Jersey Private Fund where we already have 90-odd and counting. Although Brexit didn’t really affect Jersey directly or hugely in 2017, it will affect us because the changing relationship between the UK and the EU will have an impact downstream. Objectives that we have invested in over recent years, in terms of direct relationships with EU member states and EU institutions on our third country status for AIFMD or MiFID, are effectively on hold. They are in the long grass for the near future, which is a little bit on the negative side.
On the positive side, there was no new major international regulatory initiative in 2017. It was largely a consolidation of everything that’s been taking place since the financial crisis, which has given us a much-needed regulatory pause. And I agree with Steve that the Paradise Papers were unhelpful but a case of much ado about nothing. These things will continue to come along and it will be interesting to see what Appleby can achieve in its legal moves in London to recover its data. There’s a really interesting international debate to be had on whether journalists should make money from stolen data.
Geoff Cook: 2017 was a highly successful year commercially, with many of our members reporting record business. It was a year of strong employment growth, which created another 250 jobs in the financial services industry and took us back to our pre-crisis high at just over 13,000. There aren’t many jurisdictions around the world to experience that strength of recovery from the biggest dislocation of the financial system in 100 years.
Touching on the reputation issues, they were challenging to deal with at the time but I think we’ve had a net gain because they have sparked a flight to quality. Clients who have good reputations and want to preserve them, prefer to book their business in a centre which also has a good reputation. There’s been a significant amount of transfer business from other jurisdictions to Jersey, which shows how the work of our government and regulator in creating a jurisdiction of substance is paying a strong dividend.
John Willman: Jersey is in the vanguard as a jurisdiction which meets international standards on regulation and taxation. Does the wider world understand that?
Geoff Cook: It’s very different by audience. We’ve made great strides with governments around the world, with international forums and with people who are responsible for policing the global financial system – we have a terrific reputation with them. Our own internal finance language is well understood by those audiences who see that it is backed by a big stable of advocacy research. But for the general public at home and abroad and elements of the NGO community, it’s still work in progress and we need to influence those communities, because they influence politicians to take action.
Richard Ingle: I think you’re right, Geoff – it needs to be the man or woman on the street that we reach. We know that while politicians privately say they understand what the virtues of a reputable centre like Jersey are, they don’t say it publicly.
Steve Meiklejohn: We have meetings with ministers and members of the Lords and Commons to brief them on these issues to make sure that they’ve got the full facts when they go into debates. But some of them are reluctant to be associated with promoting the offshore case, for fear that they will be attacked by the media. There’s still work to do.
Jo Gorrod: It’s very easy for the media to suggest in their reporting that there is some unfairness – that you’re being cheated by IFCs. It is very difficult to counter that.
John Riva: Some NGOs and journalists are getting better and I think Maya Forstater who has written for several NGOs is raising the level of debate. But too many NGOs are shouting from the rooftops through megaphones and businesses and politicians need to get involved. And it is important that we as IFCs are proud of the work we do and when things happen which shouldn’t happen, we should call them out.
Geoff Cook: We need to reach out to people who are not connected with our world and have concerns about unfairness, inequity, inequality and the growing gap between the wealthy and the rest of the world – we are seen as working for them. We need to explain that our primary activity is putting capital to work to build a better future for tens of millions of people around the world. Our recent research on how Jersey’s tax neutrality supports the financing of pensions, shows that 58 million people have a better retirement because of our role. We should say we think aggressive or abusive tax practices aren’t good and we don’t want to host them. And it is legitimate in times of austerity to ask whether everybody is paying their fair share of tax.
Felicia de Laat: We must engage with the media and NGOs to some extent, because there are some lone voices who make a clear case for the benefits of using IFCs but they’re few and far between. We need to shift the balance so that there are more stories that put the positive side of what Jersey and other IFCs do – at present, it’s pretty much one-sided.
Richard Corrigan: I think we need to move the debate away from being just about tax. At the end of the day, tax is a sharing of the proceeds of economic success or successful investments or successful trade. People need to know that trade and investment are lifting people out of poverty in developing countries around the world and that Jersey plays a role in it. Our finance industry moves capital from areas of surplus to areas of opportunity and we need a dialogue about that with the NGO community and others.
Geoff Cook: In our current strategic review, one of the four pillars is about communications and we have adopted a policy of ‘verbalisation’ which is designed to ensure that we describe what we do in ways that are easily understood. We must tell them that friction-free, fast-flowing capital is a raw material of economic development and if it is withdrawn, the people who are hurt most are the poorest people on the planet.
Developing countries need capital to build their economies, infrastructure, education services and health services. If opponents are successful, they’ll hurt the very communities they claim to represent.
John Harris: The narrative of those critics is that Jersey is a place where money ends up, whereas it’s a place it flows through. That is what we have to explain.
Richard Corrigan: People believe there is a huge pot of money in Jersey but we take that capital and put it to good use in another market, another asset class, another part of the world. Even if money is deposited in a Jersey bank, the bank does something with it such as lending it to other customers or to its parent operations.
Intermediation is how Jersey makes its living – there isn’t a cash pile sitting on the Island.
John Willman: I want to move on to discuss what is happening in Jersey’s main financial sectors, starting with banking and the current Future of Banking review.
Richard Ingle: The last 10 years have seen a lot of change in our sector.
Consolidation has reduced the number of licences here from about 47 to the current level of 28, though not necessarily through the disappearance of banks – there has been consolidation within names and licences. Overall deposit values on the Island have shrunk, though there has been stability in terms of client deposits, which is a testament to Jersey’s attractiveness to international depositors. And now that global banks are looking to grow and develop, it is the perfect time to make sure that we’re well-positioned to capitalise from what we think some of the global players may be doing – and obviously we’d like to attract some of that to Jersey.
So 18 months ago, we launched the review to see how we can position the Island to take advantage of new trends in the sector.
Banking is a core part of Jersey’s financial services ecosystem: it’s half of the industry’s gross value added (GVA). It feeds the other sectors such as private wealth and funds, so it’s a critical part of the local economy. Jersey Finance pulled together all the banks on the Island to contribute to the review and ensure that we have a vibrant banking community which can respond to the threats while being well-positioned for future opportunities.
We’re asking whether we are promoting our flexible licensing regime enough to potential new entrants as a banking jurisdiction with high quality regulation and ease of doing business. The aim is to ensure that Jersey is an attractive place for existing banks to stay and one that attracts new entrants to support the industry and the other sectors which operate in it.
Jo Gorrod: I think that it is essential for what we do in private wealth – we need a strong banking sector to be able to bank our clients. We found a few years ago that a bit of a mismatch was emerging between the risk appetite of some of our banks and trust companies but I think that has now been largely worked through.
John Harris: Some of that was a symptom of banks going through these difficult periods, trying to work out what their model is, the clients they want to deal with and the due diligence aspects of it. That also speaks to trying to make Jersey attractive to all sorts of entrants so that we can accommodate all sectors in the industry, not just the existing players.
FeIicia de Laat: Banking is also complementary to the funds industry, because our fund managers want to be able to bank in Jersey. It’s part of what we offer.
Steve Meiklejohn: Our finance partner has been expressing optimism around the ring-fencing that’s about to come to some of Jersey’s banks. I thought that was encouraging that she could see opportunities there for Jersey.
John Harris: There is a real opportunity for a renaissance in the banking sector on this Island and all the preconditions for that are in place – including regulation. We have an increasingly liberal bank licensing regime and are prepared to flex it so that an institution can serve the clientele it wants to serve, which includes digital banking. The one thing we won’t accept is exposing the everyday retail client to undue risk but there are ways in which we can flex the regime to make sure it doesn’t happen.
Ring-fencing has turned out to be an opportunity for Jersey. We were very worried a few years ago about the five banks that would be affected by it but four of the five have already adopted a growth model – a vote of confidence in Jersey.
John Riva: I do think that banking is the jewel in the crown for Jersey – if it wasn’t for the banking sector, we’d be just like any other IFC. It differentiates us and it’s absolutely essential that we maintain the banks and keep them happy here. Also, they still produce more tax than any other sector.
John Willman: Let’s move on to funds. Please tell us what has been happening, Felicia.
Felicia de Laat: 2017 was a very strong year for funds. Fund-raising increased by around 15% over 2016 according to the Monterey report and the number of fund promoters in Jersey has roughly doubled over the last five years.
When the AIFMD was brought in, there was huge concern about the potential impact on our funds sector and a significant amount of work was done to position us to get the best out of it. That gave us the right regulations and the national private placement regime (NPPR) is working really well for our bigger and even mid-sized funds which want to market in the EU. In truth, many fund managers really want to market to just a few EU jurisdictions, such as the UK, Netherlands, Germany and Denmark. And we can offer the rest of the world a streamlined, appropriately regulated marketing model for their purposes.
We also have the European Securities and Markets Authority opinion which says that we’re first in line for a passport to market across the whole EU. It’s unclear whether that will appear soon (and it almost certainly won’t until Brexit has been implemented) but the passport does not seem to have worked particularly well for EU member states due to inconsistent implementation.
According to one recent report, AIFMD has resulted in high costs and limited benefit for EU funds. However, AIFMD II is in the offing which could change things, although it is unclear how at the moment.
As Richard Corrigan has already mentioned, last year saw the successful launch of the Jersey Private Fund which streamlined the processes at the private end of the market and also some notable fund launches, including CVC Capital Partners VII and Softbank’s Vision Fund. For 2018, a big point of discussion is likely to be whether the finance industry has ‘substance’ on the Island – part of the negotiations with the EU over Jersey’s status as an IFC. But the growth of the funds sector is attracting promoters and fund managers to set up staffed offices here with real substance, which is a model I would like to see more of.
John Riva: No-one has been able to define substance in our world and while I agree with Felicia on what it means for funds, what does it mean for investment holding companies? They won’t rent offices and employ staff, although Jersey is where the directors meet and make the decisions. But Jersey is building a financial centre and we want to attract people to the Island because we can tax them when they are here. If an outside agency says we need more people to move here to run their businesses, that’s like manna from heaven.
Felicia de Laat: Just one more issue for funds, which is Brexit. Competition is growing from Luxembourg which is marketing itself as a jurisdiction where funds can base themselves inside the EU.
Some fund managers (particularly those of debt funds) have made the move to Luxembourg, even though we think that Jersey is much better at servicing, structuring and other aspects of administration. I’m not sure what the extent of this will be but it is a concern.
John Riva: This is likely to be a consequence of the changes to international tax rules: Luxembourg must now consider the principal purpose test when businesses wish to take advantage of its tax treaties but such a test is being confused with a substance test. Therefore we have seen occasions where advisors have advised Luxembourg platform companies which have Jersey-based funds to move the whole structure to Luxembourg to provide the Luxembourg platform company with adequate substance to satisfy the principal purpose test.
However, this may not necessarily satisfy the principal purpose test and funds should also consider other non-tax issues such as any complications of doing business in Luxembourg.
Geoff Cook: It is very important to remind intermediaries and clients listening to bidding by Luxembourg for transfers of business after Brexit, that nothing has changed for Jersey and it is very likely to be just the same after the referendum settlement. It is as good as it ever was and intermediaries and clients tell us it is a cheaper, faster, simpler route to alternative investment in Europe.
John Willman: Jo, can you please tell us about what is happening in the private wealth sector.
Jo Gorrod: It has been a solid year for us in Jersey, though with nothing ground-breaking in the sector. There are a lot fewer moves between trust companies in terms of de-risking prompting changes in trusteeship but more genuine new enquiries and new structures that people want to set up. More of them are from entrepreneurial wealth generators rather than inherited wealth, so this is all really positive. And the trust sector in Jersey has gone global compared with 10 or 15 years ago – with a significant number of trust companies operating in multiple jurisdictions.
There are some issues we’re having to deal with, not least the UK trust register and the tension between complying with the legislation and ensuring that data protection rules are not breached.
We’re already a leader in compliance and Jersey is a leader in transparency but there is more we could do with technology in Jersey by focusing on fintech.
This is one key way that the regulator can enhance Jersey’s competitive edge by supporting developments in regtech. Much could be done to make life easier for both individuals and businesses by using technology platforms to assist with the collection and management of due diligence. We have to prove identity each time for every different counter-party, which adds to the cost of doing business.
John Harris: Compliance has reached undue levels for everybody and it doesn’t diminish – it grows. Some of it is well-intentioned but ill-conceived, such as the EU Register of Trusts which has issues about defining persons with a legitimate interest and access to data which is inherently private.
Meanwhile, the EU is promulgating a data protection initiative with massive penalties for letting go of people’s individual data. Technology is part of the answer for the basic compliance data: who is somebody, where are they from and how do we authenticate who they say they are. That should be done once and networked. But technology isn’t going to give answers for more significant judgemental factors such as how somebody does business, their conduct, their reputation and so on.
Steve Meiklejohn: I think 2018 should be a good year for private wealth because all the pillars are there: strong courts, great professional services, good legislation, tremendous trust companies.
There are some changes to trust law coming in 2018: although they’re not far-reaching, they give us an opportunity to see intermediaries and talk to them about the importance to us of keeping the legislation fresh.
The charities law is now finally going to come into full effect and that will create new opportunities in international philanthropy when combined with our strong administration skills.
There is also greater confidence that the high net worth community in China is recognising the need for proper wealth structuring – and despite the distance, Jersey is well-positioned. We have the likes of Equiom and other international trust companies with strong presences out there and the banks with trust companies such as RBC and HSBC – all putting us in a good place to win business.
Richard Corrigan: I think that Jersey’s approach of creating diversity of products but setting high standards at the same time, has served us very well as a jurisdiction and secured growth in new markets. And the flight to quality has increased our growth relative to other centres that we’ve traditionally been in competition with.