As the Channel Islands prepare for the UK’s split from Europe, will they find themselves going up against the City when it comes to financial business?
Just like in the rest of the British Isles, many in the Channel Islands have been watching the UK government’s Brexit negotiations with trepidation. The decision on 23 June 2016 to leave the European Union, took half of Britain by surprise – arguably more, if you include those who voted to leave but never expected it to really happen. Step forward Boris Johnson.
And now, two years later, it’s far from clear what kind of deal the UK will be able to strike with Europe. Indeed, the picture has been made all the more opaque recently, after the government suffered a number of blows at the hands of the House of Lords – not least their efforts to force Prime Minister Theresa May to give Parliament a final vote on the deal.
As May barters with Brussels over everything from fishing rights to how many billions of pounds the UK will hand over in divorce payments, the only thing that’s clear is that the UK will be required to leave the European Union at 11pm on 29 March 2019.
But politicians in the Channel Islands are keen to stress that they aren’t passive partners in the Brexit process. Guernsey’s cross-committee Brexit Group meets fortnightly and, alongside Jersey and the Isle of Man, has a direct line into the UK’s Department for Exiting the EU.
“We’re not worried about being left behind,” says Deputy Lyndon Trott, Vice-President of the Policy and Resources Committee in Guernsey and Chairman of Guernsey Finance. “The draft withdrawal agreement contains a territorial extent clause which includes explicit reference to the Crown Dependencies. We saw this as a significant and positive step and the first sign of the EU’s intention to include the islands in the exit agreement.”
So far, much of the focus on the Channel Islands post-Brexit has been on industries other than financial services. In January, it was reported that Jersey farmers were struggling to recruit enough migrant workers to plant and harvest potatoes – a job that, since 2000, has largely been carried out by workers from Poland. As a result, farmers were considering bringing in workers from outside the EU, such as Kenya.
From ally to rival?
But while the UK is Jersey and Guernsey’s biggest trading partner, it’s also the source of the vast majority of its financial services business. Despite efforts to diversify the offshore finance industries away from reliance on links with the City of London, it is referrals from British banks that bring Guernsey and Jersey the bulk of their clients.
In the UK, much has been made of Britain taking ‘the Jersey option’ when it comes to its post-Brexit relationship with the EU. This would involve the UK, like Jersey, retaining its customs union for goods (but not services) and becoming a ‘third country’ in trading with the EU. Under the Alternative Investment Fund Managers Directive (AIFMD), the City of London would have the same status as the Channel Islands.
If that were to happen, Britain could go from the Channel Islands’ main referrer of business to its major rival. The City would be far larger and better resourced as a financial centre, catering to investors who want to invest in the EU and, perhaps, negating the need for investors to use Jersey or Guernsey at all. “The Channel Islands and the UK will be competing head-to-head for business,” says Bridget Barker, Executive Director at Zedra in London.
Even in this scenario, Jersey and Guernsey still have an advantage, says Barker, in that the islands have no VAT and are quicker and, in some areas, less regulated than London. But equally it would be relatively easy for the City to introduce a fund structure that could compete with the islands.
Meanwhile, if the last decade has shown the offshore finance world anything, it’s that lighter regulation is shaky ground on which to base business. “On both these points, the devil is very much in the detail. The Channel Islands will need to ensure that they keep ahead of the game,” Barker says.
Much will depend on the kind of Brexit May is able to deliver before the 2019 deadline. Harassed by Brexiteers on the right, the embattled Prime Minister is being pushed towards a so-called ‘hard’ rather than ‘soft’ Brexit, meaning Britain would withdraw from the EU without a trade deal. The soft option, meanwhile, would involve it remaining in the common market and would be less disruptive to the economy – in the short term, at least.
Weathering the storm
Whatever happens, the UK is expecting a decline in growth as Britain struggles to sign trade deals with other nations that will help it make up the shortfall. A much-vaunted trade deal with the US is expected to boost gross domestic product (GDP) by just 0.2 per cent. Meanwhile, abandoning the UK’s favourable trade deal with Europe is expected to lower growth by 15 per cent in the years after Brexit.
Opinion is divided on what the respective scenarios mean for the islands, but industry practitioners and local politicians have been keen emphasise that the islands could weather both.
Bryan Little, an Associate at Babbé in Guernsey, explains that the island remains a third country with respect to the movement of capital in and out of Europe either way. But anything that reduces the economic impact of Brexit on the UK economy is a good thing for the Channel Islands.
“A hard Brexit doesn’t change Guernsey’s access to European markets in a legal and regulatory sense, which will remain stable, particularly compared with the UK,” Little says. “But a soft Brexit is generally seen as being better for the UK, and what’s good for the UK is, generally speaking, good for Guernsey.”
Like Guernsey, Jersey will also retain its third-country role after Brexit. Indeed, Geoff Cook, Chief Executive Officer of Jersey Finance, envisages opportunities for Jersey in supporting UK and other non-EU fund managers distributing their funds into the EU post-Brexit.
Cook says Jersey has seen a 15 per cent growth in fund managers using its private placement regime to access EU markets, and that interest has continued into 2018.
Competing with the City
As for competing with the City, Cook believes Jersey can rise to it. “Jersey has a clear proposition, and it’s hard to see how the UK would create a comparable environment. But ultimately, Jersey doesn’t want to be a competitor to the UK. It’s focused on supporting global investment into and out of the UK, and actually that will become more important post-Brexit. We see more of a collaborative role.”
Over in Guernsey, Lyndon Trott agrees that it’s important for the islands to remain part of the British finance family after Brexit. “We know Brexit will bring many changes, but what will not change is the strong and mutually beneficial relationship that Guernsey has with the British Isles, the UK and the City. “We are looking to offer complementary services to London, particularly with global fund distribution,” he says.
But it’s also true that for both islands, the finance industry isn’t solely about the UK. Ever since the transparency push began from the OECD and Washington in the mid-2000s, the proportion of business coming from markets in Asia, the Middle East and South America has increased exponentially. In that time, Jersey Finance alone has opened offices in Dubai and Hong Kong, as well as virtual offices in Shanghai and Mumbai.
For Barker, those networks will be key to weathering the post-Brexit storm. “The best scenario is for the Channel Islands to develop additional business that’s not EU or UK dependent,” she says. “They have an excellent infrastructure and very experienced service providers, so they should seek to utilise those advantages and market themselves more widely.”