Zedra Executive Director Bridget Barker examines how the relationship between the Channel Islands and the UK may shift after Brexit
In a London cab, only recently, the taxi driver complained that things were too quiet. Although there was considerable traffic, his view was that there were fewer people around and less business was being done. So, either the old adage ‘sell in May and go away’ is proving correct this year, or perhaps it’s the beginning of the feared Brexit slowdown?
UK wealth managers have been reporting decent returns and many City law firms are anticipating bumper profits. However, the increasing rows and uncertainty over where the Brexit process will end up is casting a long shadow – will it be hard or soft? The newspapers regularly report that businesses are leaving London, and there are fewer stories about new entrants.
Traditionally, the view has been that what’s good for London is good for the Channel Islands, but it’s difficult to see what the position for the UK will be by the end of March 2019 and how that will impact on Jersey and Guernsey.
The Channel Islands have developed their considerable skills in financial services over many years of servicing overseas clients. Although this developed from working for the UK banks and other asset managers, both islands now have a far wider international client base, particularly in Europe, the Middle East and Asia.
The islands are insisting that, post-Brexit, it will be business as usual, but in the eyes of the EU they have been very tied to the UK.
At present, the Brexit draft withdrawal agreement includes explicit reference to the Crown Dependencies, and politicians in both islands say they have a direct line into the UK’s Department for Exiting the EU. However, post-Brexit, the relationship between the two islands and other EU countries will inevitably change.
Sir Phillip Bailhache, who recently stepped down as Jersey External Relations Minister, said earlier this year that convincing European politicians that Jersey is a well-regulated jurisdiction was an “uphill struggle”.
Jersey has been considered offshore to the UK and possibly perceived as providing less stringent regulation. Bailhache said he wanted “to persuade the countries of the EU to allow us to continue to operate as an international financial centre in the way we have done in the past”.
Going head-to-head
Following Brexit, the UK will be offshore as regards the EU, and a third country for the purposes of the Alternative Investment Fund Managers Directive (AIFMD) – so Jersey and Guernsey will be competing head-to-head for business with the UK.
The Channel Islands’ key card is, of course, tax – particularly the lack of VAT. However, if the UK government can be persuaded to introduce a fund structure that’s as tax-efficient for investors as a Channel Islands fund, it will be easier for a promoter to establish a competitive fund structure in the UK, so cutting out the need to use an offshore centre.
Both Jersey and Guernsey have benefited from offering structures that require relatively light regulation – although there are still fairly stringent regulatory requirements on the administrators of such funds. Private funds, which are aimed at professional investors and can be set up in a few days, are popular.
However, on both these points the devil is very much in the detail, so both Jersey and Guernsey will need to ensure that they keep ahead of the game.
The best scenario is for the Channel Islands, post-Brexit, to develop additional business that isn’t EU or UK dependent. Both islands have strong infrastructures and experienced service providers, so should seek to utilise those advantages.
Both islands are ready to take advantage of the AIFMD passport, once that becomes available, and in the interim will continue to utilise the national private placement regimes (NPPRs).
UK managers, on the other hand, have to date been able to use the AIFMD passport but will have to learn about the various individual NPPRs. External marketing has already started. Both Jersey Finance and Guernsey Finance have active programmes of promotion to other financial centres.
Jersey has recently enacted legislation to permit the establishment of limited liability companies (LLCs) based on the US model, providing something that’s familiar to US managers. Guernsey is considering the concept of a ‘Green Fund’, which places emphasis on impact investing, currently a popular theme with many international investors.
Irrespective of what happens to the UK, thinking about an independent future after Brexit is important. Continuing to develop innovative products and marketing the Channel Islands to a wider audience will inevitably be more necessary.