The money men

Monday, 01 October 2012
An interview with the Hon Eddie Teare MHK, Isle of Man Treasury Minister; Senator Philip Ozouf, Jersey Treasury and Resources Minister; and Gavin St Pier; Guernsey Treasury and Resources Minister.

What are your main responsibilities?

Teare: The Isle of Man Treasury is responsible for a range of fiscal and economic functions, such as the administration of the island’s general revenue streams, the collection of customs and excise and income taxes, setting government budgets and targets, and economic planning. The job is varied and demanding.

Ozouf: The Treasury’s main responsibilities are designing, consulting on and giving approval for financial and fiscal policy; setting and monitoring States budgets; monitoring, implementing and reviewing taxation; reviewing States activities and spending to ensure resources are used effectively; managing States buildings; allocating and monitoring public sector staffing levels; and representing the States in publicly owned companies.

Jersey has assets of more than GBP3 billion, no debt and a strong balance sheet. We now need to strike the right balance between increasing public spending to meet the needs of islanders and supporting the economy, while maintaining a competitive tax regime in the best economic interest of Jersey.

To achieve these aims an important change has been put in place, namely the move to a three-year planning framework or medium-term financial planning. This change is intended to provide flexibility, deliver efficiencies and move to longer-term thinking.

One of my main tasks is to lead the Treasury as it manages the operational performance of the States and to focus on managing all our finances – including investment strategy and capital investment.

St Pier: Guernsey is fiscally independent, and as Treasury and Resources Minister I have strategic oversight of Guernsey’s taxation system – business taxation, as well as direct and indirect personal taxation. This means I will also be leading on Guernsey’s work with other jurisdictions, including the UK, on tax issues. Like all responsible jurisdictions Guernsey is tightening its belt, so I also have responsibility for ensuring that as a government we meet our efficiency and savings targets. I also work closely with our Chief Minister, our Commerce and Employment Minister and other ministers on ensuring Guernsey remains a great place to do business – not least for the financial services sector in general and trust industry in particular.

Have you seen any major shifts in the business flows coming into the island since the financial crisis in 2008?

Teare: The principal business shift immediately after 2008 was in the reduction in the profitability of the banking sector, although business levels in the industry were still strong. There was some regaining of lost ground in 2010–11, but euro uncertainties have constrained growth since.

Against this, offshore life insurance has performed well throughout the period, although the funds industry, already disadvantaged by a lack of critical mass, has suffered.

But the Isle of Man has a very diversified economy and real growth in non-finance areas made sure that overall the economy continued into a 29th year of unbroken growth. So, for instance, our strong manufacturing sector, made up essentially of high-value production using advanced technologies, such as in aerospace, oil and gas, and optics, grew by 3.5 per cent in real terms in 2010.

Interest is also now coming from a number of new areas in cleantech, emerging IP in human sciences and international trade, but the inward investment and business flow that most captures the eye has been in e-gaming, which has approximately trebled in size since 2008.

Ozouf: The continued slowdown in the EU and in the US, the aftermath of the financial crisis and the backdrop of economic uncertainty has resulted in Jersey seeing a variety of peaks and troughs in the performance of our finance sector.

While bank deposit balances have fluctuated from quarter to quarter, we have seen decreases from the EU and economic experts predict that we will continue to see slow growth for some time to come. However, we have recently seen an increase in deposits from the Middle East, which reflects the strategy of Jersey Finance having an office and presence in the region.

The funds sector has performed well and we have observed significant year-on-year increases in both net asset value of funds under administration and the number of both regulated and unregulated funds.

We have recently unveiled our medium-term financial plan, whose objectives include further market diversification and attracting inward investment. We will be increasing funding to Jersey Finance, to target growing markets in the BRIC economies, and also to Locate Jersey, to encourage inward investment and new businesses to operate from Jersey.

St Pier: Overall Guernsey’s finance sector has held up very well since the beginning of the financial crisis. Some sectors felt the impact of the crisis more than others. Small reductions in the size of some sectors and business flows have been outweighed by growth in others and the finance sector is in very good health. Guernsey is not immune to global economic factors, but it is well equipped to meet the economic challenges that it faces.

Former Barclays Chief Executive Bob Diamond warned of the danger of ‘Balkanisation of banking regulation’ as new provisions are brought in around the world. What challenges does this pose for a smaller jurisdiction?

From left to right: Eddie Teare MHK is Treasury Minister for the Isle of Man, Philip Ozouf is Treasury and Resources Minister for Jersey, and Gavin St Pier is Treasury and Resources Minister for Guernsey

Teare: Ongoing financial crises have led to heightened regulation as one means of seeking greater financial stability. In some countries the move towards more regulation has also produced a sense of increased protectionism – or ‘Balkanisation’.

The island’s regulators have a policy of adopting international standards wherever possible. Some of these standards have inevitably been strengthened in response to initiatives. In keeping closely in touch with external developments, the island will seek to ensure it does not put itself at a disadvantage to other markets while continuing to be viewed positively in international assessments. Customer confidence is critical, so it will be essential that we sustain our reputation for soundness.

Ozouf: There are certainly challenging times ahead for the banking sector. We have been working closely with both the industry and the regulator in Jersey following the recommendations of the Independent Commission on Banking (ICB), detailing the way forward on the Vickers report.

The white paper refers to the Crown Dependencies and it is encouraging to see that the combined efforts so far have had some impact on accommodating upstreaming of valuable deposits into the UK banking system. We are currently working on solutions that will ensure that these deposits can be deployed to best effect, whether that be via a group Treasury operation or a ring-fenced bank.

In addition, we continue to work with Jersey Finance, the Jersey Bankers Association and the British Bankers’ Association to inform and encourage the right outcome for the UK banking industry as well as for Jersey, while ensuring that we operate in the spirit of Vickers and in accordance with the intentions of the UK government.

St Pier: I take the phrase ‘Balkanisation of banking regulation’ to refer to the potential deglobalisation of capital flows as a result of new regulatory capital and liquidity rules and the separation of different areas of banking activity in larger banks. The development that is most likely to have a direct impact in Guernsey is the UK government’s implementation of the ICB recommendation that domestic retail banking activity should be ring-fenced from higher-risk wholesale and investment banking. This will have a major impact on the structure of many large British banks, some of which have branches or subsidiaries in Guernsey. We in Guernsey have been working with our colleagues in the other Crown Dependencies, and those working on the implementation of the ICB recommendations at HM Treasury, to identify the implications of the UK proposals for local banking operations. We are pleased that the UK government White Paper on banking reform identified at paragraph 2.25 that the government is working with the Crown Dependencies to establish the conditions under which branches or subsidiaries in those jurisdictions would be consistent with the UK’s objectives of ring-fencing. We are working closely with our banking sector and the Guernsey Financial Services Commission, as well as taking account of the interests of local residents, in determining the right approach.

How will FATCA affect you?

Teare: FATCA will affect many financial services businesses, so the Isle of Man needs to be ready for its implementation at business and government levels. We have set up a working party of senior government officers and a liaison forum with industry to ensure that all stakeholders are updated with FATCA developments. In addition we are working with the governments of Guernsey and Jersey on matters of common interest and have direct communication with the US Treasury Department. So although FATCA will clearly have an impact on the Isle of Man, we intend to manage that impact professionally and in good time.

“Vigorous political and public debate will result in new definitions of and approaches to abusive tax arrangements”

Ozouf: Financial institutions in Jersey will have to respond to FATCA in the same way as financial institutions the world over. Because it is global in its application, Jersey’s competitive position is not adversely affected, but there will be an additional cost in meeting the FATCA requirements.

Jersey has been in contact with the US Treasury Department, together with Guernsey and the Isle of Man. We have been exploring the opportunities to reduce the burden on the financial institutions through an intergovernmental agreement along the lines of the one reached between the US and five EU member states, including the UK, from whom good guidance has been received.

Through a working group of finance industry representatives the Jersey authorities have sought to ensure that the action to be taken is well managed and timely and is accepted as being in the best interests of the industry and of the island.

St Pier: FATCA poses the same challenges to the local finance sector as it does in other jurisdictions. Guernsey has been working with the finance sector for over a year to ensure that, as a government, we do all we can to assist local businesses in complying with the requirements of the FATCA regime while keeping compliance costs to a minimum. We have closely followed the development of the model partner agreements between the US and five EU member states, including the UK, and also the alternative model being pursued by Switzerland and Japan. We have also been working with our colleagues in the other Crown Dependencies to try to agree a joint Crown Dependency approach and have registered our interest, with the US authorities, in exploring the possibility of a partner agreement. We are continuing to work with all the relevant stakeholders to identify the right way forward for Guernsey and hope to announce our direction of travel in the near future.

Alongside the jurisdictions taking action unilaterally against abusive tax planning, we are also seeing a growing number of multilateral initiatives, for example the EU Commission’s announcement of a programme of work aimed at addressing the problem of ‘harmful tax competition and revenue loss and unfair competition deriving from aggressive tax planning’. What are your views on this issue?

Teare: The Isle of Man is committed to, implements and applies generally agreed international taxation standards. The Isle of Man does not condone tax evasion at home or abroad. Nations must be able to legislate and act against abuses of their tax systems. The Isle of Man recognises that there is a vigorous and wide-ranging political and public debate in many national and international forums, which, while not yet constituting an emerging consensus, will result in new definitions of and approaches to tackling abusive tax arrangements. We think that ‘aggressive’ will be defined as behaviour seeking to thwart the express aims of national policies and tax codes.

Ozouf: Jersey recognises and fully understands why, in the current world economic and financial climate, many governments, particularly those in Europe, are seeking ways through unilateral and multilateral action to increase their tax revenues by more actively addressing illegal tax evasion and legal but aggressive tax planning.

Jersey has had its own general anti-avoidance powers for more than 50 years. Jersey therefore does not view with concern the recent publication by the UK government of a consultation document on ‘Lifting the lid on tax avoidance schemes’.

What would be of concern is if action taken unilaterally or multilaterally was discriminatory in its application or without due recognition of the extent of Jersey’s compliance with international standards on transparency and exchange of information for tax purposes. Jersey has signed 29 tax information exchange agreements and four double-taxation agreements, almost entirely with G20, OECD and EU member states, and has responded to well over 100 requests for tax information to the satisfaction of the requesting authorities. There would be concern if no credit is given for this, particularly as information availability in Jersey exceeds that in many of those member states.

What the Jersey authorities have done to reinforce this position is remind the finance industry, the regulator of financial services and relevant government departments of the role they are expected to play in supporting the policy objective of continuing to enhance the island’s reputation as a well-regulated and responsible international finance centre.

St Pier: Guernsey is a well-regulated, cooperative, tax transparent jurisdiction, and adheres to international standards; indeed in many cases we exceed them. We have signed 35 TIEAs to date, exceeding the 12 required for inclusion on the OECD white list of countries that have substantially implemented the internationally agreed tax standard. We have also implemented automatic exchange of information in line with the EU Savings Tax Directive and have committed voluntarily to complying with the EU Code of Conduct on Business Taxation. We intend to maintain our compliance with international standards in the field of tax transparency in future. In the current economic climate, it is inevitable that taxation continues to be a topic of political discussion around the world and we are keen to be involved in those discussions.

What do you see as the main challenges facing the island?

Teare: Like governments everywhere, the Isle of Man is facing significant economic and fiscal challenges. Our key priorities are to grow the economy and to rebalance our finances while protecting the vulnerable. We must continue to adapt in relation to the international environment, while maintaining competiveness and enhancing our international profile.

Ozouf: Jersey has traditionally provided a good quality of life for its residents and a competitive climate for its businesses. We will continue to face challenges in the coming years and we need to maintain a careful balance between our economic, social and environmental policies as we deal with those challenges.

The most immediate priority is to get people back to work and create new employment opportunities through sustainable economic growth. We are committing funding to existing back-to-work schemes, and our new Economic Growth Strategy is designed to help with job creation and to better align inward migration with new employment opportunities for local people.

We will continue to support high-value immigration for businesses that create and safeguard local employment, and to generate tax revenue to fund our front-line services.

“To get people into work and grow the economy there has to be investment”

We are a small island and must preserve our resources and way of life. However, we want to make it clear that Jersey is open for business for companies that bring high economic value to our island.

St Pier: The challenges facing Guernsey are not dissimilar to those faced by other developed economies: how to maintain and grow a competitive, diversified economy in a challenging economic environment to fund high-quality public services with longer-term demographic aging.

What are your key priorities for the coming year?

Teare: Protecting, growing and diversifying our economy is a core priority. As I touched on earlier, we do have a number of promising areas of economic development. We must continue working to protect and enhance our international reputation.

Here in the Treasury we will continue to develop the Budget rebalancing strategy and, while pursuing this priority, we will work with our colleagues across government to make decisions that make the best and most fair use of available resources.

In meeting the financial challenges that we face we will aim to protect the vulnerable and support a society that is caring, compassionate and fair, and maintain the island’s quality of life and social cohesion. In summary, we must focus on continuing to deliver a prosperous and caring society.

Ozouf: If we are going to reform health, get people into work and grow the economy there has to be investment. Based on our future income projections we plan to allocate some growth to achieve our priorities in the Strategic Plan.

Over the next three years we will be balancing our budgets and we will not be moving from our current system of taxation. Zero/ten will remain and goods and sales tax will stay at 5 per cent. I am committed to low taxation, broadly based and levied in a sustainable way. That is the Jersey system and will remain so. We are also planning our capital programme, which aims to provide more stimulus to our local economy at the same time as delivering improvements to our services, including health, physical environment and infrastructure.

Despite uncertain global economic conditions, we have the capacity to invest in projects that support economic growth. Our new Economic Growth and Diversity Strategy makes it clear that we are committed to supporting existing businesses and stimulating growth in financial services as well as attracting new, high-value business to the island.

The next three years will be about developing our economy, building employment for islanders and sustaining the investment necessary to keep Jersey special.

St Pier: My key priority in the coming year is to ensure that we deliver our plans for tight expenditure control.

What do you think of STEP?

Teare: I think that it is vital that all practitioners working in the financial services sector should have strong professional bodies that promulgate high standards, ethics and best practice, and consider STEP to be an excellent example of such a body. We have approximately 350 STEP members in the Isle of Man, and I would like to see that number increase as a reflection both of the growth in our finance centre and its globally recognised quality. In other words, the Isle of Man brand goes very well with the STEP brand.

Ozouf: STEP provides a number of benefits to the finance industry in Jersey. It is essential that professional bodies like STEP offer guidance to their members and play a role in setting standards and giving examples of best practice.

The programme launched by STEP earlier this year to help fight abusive tax avoidance is one of the many examples of how the organisation leads the way in best practice. It reinforces the view that bodies like STEP have a key role to play in developing guidelines on complicated global issues.

St Pier: Since being elected, sadly I have had to stand down as a Deputy Chairman of STEP as I would have been unable to devote the time to the role that the Society deserves. I hold STEP in the highest regard. It is quite simply the premier international body for trust professionals, without question, and I will be retaining my membership. I thoroughly enjoyed my involvement at all levels of the Society and would encourage all members to take an active role in STEP’s life where they are able to do so. I wish STEP, its staff and members worldwide the very best for the future.

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Jennifer Palmer-Violet

Jennifer Palmer-Violet is the PR and Communications Executive for STEP.

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