Unless the UK's negotiations to leave the EU turn thoroughly toxic, hopes are high that Jersey’s all-important finance industry will gain from the divorce. The largest of the Channel Islands, Jersey’s market access arrangements should remain unchanged and it is likely to become an increasingly important gateway for EU-UK and global investment.
According to Capital Economics, trade accounts for 31% of Jersey’s GDP, compared with 20% 30 years ago. International trade is growing at 7.9% annually, and crossborder lending from international banks has risen from $1000bn in 1980 to $25,000bn in 2015.
Ongoing globalisation has produced international finance centres (IFCs) such as Jersey, whose services facilitate efficient crossborder transactions. Like other first-class IFCs, Jersey offers taxation, regulation and supervisory regimes shaped to the needs of institutions, businesses and individuals with crossborder asset portfolios.
Alongside stability and expertise, Jersey’s primary attraction is its tax-neutral pooling for foreign investment, meaning with much FDI now being pursued by multiple investors from different countries, Jersey makes a normally convoluted process much quicker and cheaper.
EU and UK relations
As a crown dependency, Jersey is British, culturally and constitutionally speaking – but it is politically and fiscally independent. This gives the island unrestricted access to the UK market and, 43 years ago, enabled it to opt out from joining the EU.
Unsurprisingly, Jersey’s main trading partner is the UK and its links with the City of London are very close. The island’s banks, trusts and funds manage some £1300bn (1650bn) from the UK, according to Capital Economics. Its net benefit to the UK economy is in the order of 250,000 jobs and £14bn in economic activity, and for every £20 of FDI into the UK, £1 is supplied through Jersey.
Regarding the EU, Jersey is a ‘third country’. Amy Bryant, chief operating officer at investment promotion agency Jersey Finance, explains: “Under a piece of regulation called Protocol 3, [Jersey] is part of the EU customs union, and that covers their trade relationship. But in relation to services, specifically financial ones, it’s not part of the EU and any access needs to be negotiated.”
Indeed, Jersey has had to demonstrate its regulatory standards were equivalent to the EU’s, thereby gaining third country access to the EU market for its finance industry. With this framework in place for 40 years, Jersey is now custodian of €1700bn, according to Capital Economics. It facilitates €188bn of FDI, thereby supporting 86,000 jobs in the EU.
In terms of origin of assets managed in Jersey, 42% come from the UK, 20% from the EU, and 38% from the rest of the world, says Capital Economics. The figures for destination of investment are very similar. Thus, Jersey’s all-important financial services, which account for 60% of its tax, are deeply attached to the EU and UK, but not dependent on them.
The vote for Brexit does not look set to change Jersey’s relationship with the UK and is unlikely to alter its EU arrangement in terms of market access. Protocol 3 will lapse after Brexit is finally realised, but this will “not suddenly ‘derestrict’ Jersey’s policymakers [since its] legislative is largely free”, says Jersey Finance’s Brexit Report.
More importantly, for the financial services, Jersey’s third country access rights will remain since it is already outside the EU. The only possibility of these rights being affected is if the EU becomes more protectionist, which is difficult to envisage since “the EU is committed to attracting global investment [and] Jersey facilitates a significant amount of this”, Jersey Finance says.
The immediate impact of Brexit fell on sterling, causing a flurry of FDI into the UK as exchange rates became more favourable. “We’ve benefited and seen that come through Jersey,” says Geoff Cook, chief executive of Jersey Finance. As the pound recovers, this advantage will dissipate, however.
More ambiguous in consequence are the next two years of uncertainty as Brexit unravels. Business, and especially investment, dislikes uncertainty. It is unsurprising, then, that authorities from the IMF to the London School of Economics predict a fall of FDI into, and from, the UK over the coming years. Jersey Finance expects this shortfall to “contract [Jersey’s] finance industry”, but says that “Jersey is well placed to ride [this] due to its increasingly global outlook and clientele”.
More optimistically, Mr Cook says: “As some UK and EU investors are concerned about long-term certainty during the negotiations, Jersey can offset that by providing them with a [stable platform] to launch their funds, since we’ve got enduring market access.”
Subsequently he expects to “see more business coming through Jersey, but not lots of lift-and-shift relocation from the UK”. Rather than taking “big-bet risks” in moving to Frankfurt, “it’s more attractive for UK businesses to keep the focus of their operations in London and just use Jersey as a booking centre, a gateway for market access”, he says.
Mr Cook stresses that, unlike Paris and Frankfurt, Jersey offers London collaboration and partnership. “Besides, with only 100,000 residents, we’re too small for many people to move over. Also, in many ways London feeds Jersey, and we don’t want to bite the hand that feeds us.” The island will be sharing its experience as a third country with the UK, should it want to follow suit. There will be talks at a variety of levels, from Westminster to the City.
Since currently the form of Brexit the UK will take is unknown, its long-term effect on Jersey is still undefined. Naturally, if the UK comes out stronger, Jersey will only benefit. If things turn nasty and return to, say, basic World Trade Organization trade rules, the UK's economy will be weakened and the decreasing business volumes will have a knock-on effect.
However, Jersey Finance’s report concludes “the traditional strength of the UK should result in it continuing as a major finance centre with Jersey [at its side]”. Similarly, Mr Cook believes: “The UK is highly attractive, especially to those outside Europe, such as China and India, so investment will increase from elsewhere and [therefore to Jersey too].” UK prime minister Theresa May’s recent trade missions to India and Asia support this assertion.
From a regulatory perspective, FDI into continental Europe is complicated, and a ‘hard’ Brexit will only make that worse. But if this happens, Mr Cook believes it will only make Jersey’s [tax-neutral pooling services] more relevant. “We can provide a safe gateway and smooth participation into Europe or the UK,” he says.
Not only would this increase UK-EU investment through Jersey, and vice versa, but global investment too. In particular, Mr Cook expects US investment via Jersey into the UK or EU to grow, adding: “We’re also English speaking and have similar legal systems and time zones.”