Rising to the FS challenge

With the cost of living increasing dramatically, there is concern that people may leave expensive places to live – such as the Channel Islands – taking with them the expertise and talent needed to protect the islands’ thriving financial sector. So has the Channel Islands financial sector peaked or is there still room for growth?

The mounting pressure on household budgets is clear. More than four out of five adults in the UK have reported an increase in the cost of living since the turn of the year.

The Russia/Ukraine conflict, escalating inflation – which has reached its highest level since 1992 – an ongoing energy crisis and spiralling food prices, all mean household budgets are under increasing pressure.

For residents of the Channel Islands – which is consistently ranked by cost of living database Numbeo as being in the top 15 most expensive places to live in the world – the challenges are acute.

In March, the Jersey Consumer Council (JCC) sent an open letter to the Chief Minister, Senator John Le Fondré, requesting temporary measures be put in place to help residents who are struggling to cope.

In April, however, Senator Le Fondré rejected the JCC’s requests – a move that could have serious consequences not only for personal finances but also for the financial services industry, which relies 
on the people living in the islands.

Jersey Finance reports that 13,500 people work in the financial sector, while 22% of Guernsey’s working population are engaged in financial or legal activities related to the sector. If it becomes unaffordable for people to live on the islands, a mass exodus would be catastrophic for financial services.

Joe Moynihan, Chief Executive Officer at Jersey Finance, says: “From economic growth and employment to connectivity and community support, the finance industry makes a significant contribution to the prosperity and wellbeing of our island. Its value to Jersey is clear.”

It is for this reason that in April, Jersey Finance published a manifesto – Working Together for a Better Future – setting out expectations for Jersey’s new Assembly, which came to power in June, and demanding it protects and enhances the financial sector (see boxout). 

Attract and retain

Guarin Clayton, Client Services Director at private wealth company FCM, welcomes the Jersey Finance initiative, adding that the islands have long faced a challenge in attracting and retaining the right people to service the financial sector.

“It is a perennial problem, just as it was when I came to the islands in 1988,” he says. “Primarily, you need an extensive and capable well-educated workforce with the ability to earn enough to live here. The educational needs of those anticipating working in financial services, or indeed those already in the industry, is key.”

David Bailey, Chief Operating Officer of RBC Wealth Management, accepts that managing the cost of living presents challenges for the financial sector, but believes the story is the same in most western democracies.

“Is the cost of living a problem in Jersey? Absolutely. It is also a problem in Guernsey – but that is the same for almost every Western developed society,” he says.

“We see time and again people who have moved away from the Channel Islands because they want to build a career elsewhere, returning when they are making a decision about family life. It is at this point that the Channel Islands become attractive again.”

Gail McCourt, Head of Private Client Fiduciary Services, also at RBC Wealth Management, adds that the Channel Islands is “lucky in terms of the skill sets and the talent pool”.

She notes that policymakers have supported local schools in nurturing the appropriate talent to ensure a good supply of human resource to Jersey’s and Guernsey’s financial sector.

However, according to Jersey Finance, “home-grown talent will not always fill market gaps, or in the numbers needed, and that migration allows for fresh ideas and diversity”.

As a result, the organisation says the incoming Assembly must “ensure the ongoing supply-demand dialogue with the industry to understand talent shortages and requirements and allow employers to access and relocate to the island specialist expertise that complements local skills”.

Building a reputation

If the Channel Islands is to secure its position as a centre of growth for financial services, it will need to build on its reputation as a secure, stable and safe place to do business.

However, Clayton warns of the need to balance a well-regulated infrastructure – which comes at a cost – with the risk of losing business to cheaper and less reputable jurisdictions.

He points out: “A concern would be if the Channel Islands were priced out of the market. The cost of doing business here and the maintenance of top-tier status is a huge pricing factor. 

“The reputation of Channel Islands services is paramount and there will always be questions as to whether the industry is a force for good, moreso with recent sanctions relating to Russian clients and their interests. How is that perceived, and does it outweigh the considerable good that comes of a well-regulated industry?”

For some entities, a robust reputation is a significant motivational factor for locating to the islands.

Butterfield set up a banking office in Jersey in 2018 and is expanding its operations in Guernsey. Noel McLaughlin, Managing Director of Butterfield in Jersey, says: “We are pushing against the tide; as some banks are leaving, we see the Channel Islands as a premier finance centre that is well regulated and has a lot of stability.”

This elevated level of regulation also influences the types of business and clients preferred by institutions operating out of the Channel Islands.

Ed Shorrock, Director of the financial services compliance and regulation business at Kroll, says: “The future is ultra-high-net-worth individuals and family offices. We have seen a big shift towards business getting out of private wealth and instead focusing on corporates running pension funds.

"It can be too problematic to deal with the risk that sometimes comes from private wealth clients.”

This adaptation, Shorrock says, is nothing new. He argues that there has long been a propensity for institutions on the islands to adapt to changing circumstances and shape their services accordingly.

“One thing the Channel Islands is good at is having the ability to transform and adapt to whatever challenges they face. They have shifted their unique selling point from an offshore jurisdiction known for not sharing information and for secrecy, to one that is renowned for high levels of transparency and regulation.”

Clayton agrees, noting that trust businesses rethought their structures in the wake of legislative change.

“There isn’t a particular area in [financial services] that doesn’t have a sustainable future,” he says. 

“For decades trust structures minded to invest in UK residential property typically established an underlying company to hold such property and yet legislative developments in recent years virtually changed that overnight. Many predicated a rapid decline as a consequence, but the industry approach was to adapt.”

Shorrock notes that the islands are also a breeding ground for private equity and fintech companies.

“They have been able to use a low cost base and attract business,” he says. “But equally they’ve not needed a large footprint – those start-ups were quite successful at leveraging technology.” 

Digital transformation

Despite that, for tech-focused financial companies to continue to set up shop on the islands, Jersey Finance says there must be a growth in digital services and expertise to support them.
 
“Jersey is a jurisdiction of choice, not necessity. Our ability to stay connected and remain ahead depends on the Assembly’s commitment to both investing in technology and innovation, and enabling the environment to facilitate it, as well as demonstrating courage and open-mindedness,” the manifesto states.

Clayton says Jersey is already able to demonstrate its digital expertise and that the response during the global pandemic, when so many companies were forced to switch to homeworking, was positive.

“From cyber security to platform connectivity, to infrastructure and beyond, without that and the resources and commitment to develop, Jersey’s status would diminish,” he says. 

“When you look at the working-from-home directions and guidance imposed throughout the pandemic, it was remarkable how the finance industry adapted, from a Channel Islands perspective, and the industry remains the force that it is.”

RBC’s McCourt agrees that Jersey is embracing digital innovation, noting that the jurisdiction had the world’s fastest internet speed in 2021.

“While we’re not Silicon Valley, we are uniquely placed to be very agile and nimble in terms of how agencies work together across the digital space,” she says. “We meet some interesting and inspirational entrepreneurial individuals who could be anywhere in the world, but they’ve chosen to be here. 

“It’s important that the community in Jersey listens to them, uses their insights and thinks about how we can connect with them as we move forward.”

At the time of writing, Jersey voters were heading to the polls to select a new Assembly. While it appears the winning party will inherit a thriving rather than declining financial services sector, it will be incumbent upon them to continue driving the industry forward.

As Jersey Finance says: “With an Assembly that provides the right support, Jersey’s reputation as one of the world’s most stable and successful IFCs will stand firm for decades to come.”