Beyond the picture postcard images of castles, beaches and horticulture, there is a hard-nosed business ethic in the Channel Islands.
Private banking is a well-established and vital part of the economies in the two biggest islands, Jersey and Guernsey. The Brussels-based Centre for European Policy Studies calculates that in Jersey, 55% of the local economy is accounted for by the offshore sector. Tourism accounts for just 24%.
In Guernsey, it is a slightly smaller, but still substantial, 45% and dwarfs other major industries such as horticulture, manufacturing and tourism.
This all translates to a lot of money being made from the offshore industry.
Recently published figures from the Guernsey Financial Services Commission show that banking deposits grew from £30.2m a decade ago to almost £60m by 2000 – not bad for a population of just over 64,000.
But all is not well in the world of the Channel Islands’ offshores.
A combination of the global economic downturn and the need for increased scrutiny in private banking has meant that the islands have had to change their act and, just as importantly, be seen to change their act.
Other contributing factors are the raging bear market over the past two years, the spotlight imposed by the Organisation of Economic Co-operation and Development’s financial action task force (FATF) into the dark and murky world of offshore banking, and the long-running row over the European tax savings directive.
By no means are the Channel Islands unique. The dip in the equity market has affected all offshores. Similarly, the new global interest in private banking after the events of 11 September 2001, has had worldwide repercussions.
And the European tax savings directive has caused conflict beyond the gentle shores of Guernsey and Jersey.
However, in some ways the tax savings row has been harder for the Channel Islands than for other offshores. Guernsey and Jersey’s geographical proximity to and arms-length political relationship with the UK and, by extension, the European Union has meant that the Channel Islands’ financial sector has, more than most, come under close scrutiny in the past few years.
The UK has supported the move towards greater transparency in the offshore markets, yet here are two islands (three if you count the Isle of Man) under the Crown that are offshore centres with all the baggage that carries.
Both Jersey and Guernsey have decided to implement a withholding tax in response to the EU’s drawn-out decision to go ahead with its tax savings directive.
It will come into force from January 2005 – the same time as its northern neighbour Guernsey introduces a similar levy, which will eventually rise to 35%.
The tax will be paid by savers to prevent their details being disclosed to other countries within the EU – as the directive will make possible. The move seems to have the backing of the business community on both islands.
‘Jersey does not wish to be seen as a haven for those who have something to hide,’ says Jersey States Senator Frank Walker.
In Guernsey, Gavin Tradelius, deputy-chairman of the Guernsey International Business Association, seems unworried. ‘We have a history of being able to adapt. In every problem there’s a solution – that’s the positive of it,’ he says.
The message is upbeat, but others feel that the withholding tax will have an impact. ‘It will affect their competitive position,’ says Karel Lannoo, chief executive of the CEPS, which has long called for more transparency when it comes to the world of offshores.
But Lannoo thinks, regardless of the tax’s effects, what it shows is the continuing drive towards increased transparency being forced by the regulators on to the offshore sector. ‘The main concern is always banking secrecy,’ he says.
And Tradelius, again accentuating the positive, believes that the impact, for Guernsey at least will be offset by the type of clientele that it has.
‘It will have a modest impact. Our clientele is very international, not just European, not just individual investors. We have a very big relationship with Asia and the Far East. That diversity is our strength,’ he says.
Quite what the percentages are for the different geographical groups is unknown. And many are corporate organisations that will be less impacted by the changes brought about by the directive than individual investors. But are there any other black clouds on the horizon that could impact upon the Channel Islands and other offshores?
Well, the FATF are preparing new guidelines for the banking industry that should be published later this year. This is a sign that the focus on offshores will not end now the row on the tax savings directive is over.
Jersey’s finance chiefs have already admitted this will have a significant impact on its financial sector. The ‘war on terror’ shows no sign of abating and financial directives will continue to flow from Brussels.
Guernsey and Jersey can expect the spotlight to be shone on them in the near future. And, as that happens, they will be competing against each other even more for new business.
Already Deutsche Bank has announced it is ‘restructuring’ its Channel Island operations, creating 15 new jobs in Guernsey but shedding 40 in Jersey.
But Tradelius remains pragmatic. Whatever new regulations come their way, the banking sector on both islands is well established enough to sort out its own problems, he says. And when it comes down to it, it is not the attempts at new rules or the ever-watchful eye of the FATF that will determine the future for both islands – it is economics.
A recovery in the equity market is essential, Tradelius says. ‘The whole financial community has gone through a very difficult period. If anything is going to create confidence it is an upturn in the equity market.’
- David Harding is a freelance journalist.
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