Jersey’s fund industry cries out for clarity over Brexit

The Channel Islands of Jersey and Guernsey – both tiny Crown Dependencies linked to the UK – have prospered over the years through their vibrant financial services industries. Both have cleaned up their reputations following periods when they attracted questionable tax and secrecy-led business in the 1980s and early 90s.

But today they are looking to establish niches, attracting private equity and hedge funds seeking to base themselves in jurisdictions with a high quality of life, good links to London, and established regulation and financial infrastructure. 

They are also honing their asset protection structures to attract clientele from further afield, often countries in the Middle East, the former Soviet Republics and Asia, where political uncertainty leads wealthy entrepreneurs to register businesses in and move assets to alternative homes.

While growth has recovered since the damaging financial crisis of 2008, the new challenge for both islands is Brexit and how the relationship of the Crown Dependencies with both the UK and the EU will change once Article 50 has been triggered by prime minister Theresa May in London.

In Jersey’s capital of St Helier, the post-Brexit uncertainty is clearly the key topic of concern in both government and financial circles, as island firms talk about what the concept of “Jexit” might look like.

Island authorities are in ongoing talks with the UK government, keen to be “at the table” and to preserve Jersey’s position outside the EU but with freedom of trade and movement of goods to the single market. 

The island of 45 square miles relies on foreign labour to provide services for increasing numbers of workers employed in Jersey’s financial industry and this need is further highlighted during development of the brand new International Finance Centre, taking shape on the Esplanade in St Helier. 

Nearly 20 per cent of the population were born outside Jersey, with many workers from Portugal, Poland and Romania. Locate Jersey, the body which promotes the island to foreign businesses is aware that new skills must come from abroad in order to prevent stagnation. and is worried about the new period of uncertainty eminating from the UK.  

Local law practitioners are particularly concerned about the island’s immigration policy and its “state of flux”. One way of getting round the expected shortage is training up youngsters locally. “We invest as a firm in training young people with A Levels and they can work their way up through the ranks,” says Keith Dixon, the partner responsible for trusts and private wealth at island law firm Carey Olsen. “In the UK, they would not get near to a legal firm without a degree.”

Regulators are also frustrated about the spanner which Brexit has thrown into their plans for marketing Jersey-based investments freely across the single market. “Brexit has changed the climate for some of the approaches and goals we are trying to achieve through the EU,” laments John Harris, director general at the Jersey Financial Services Commission, the island’s regulatory body. 

He was in advanced negotiations for private equity and real estate funds registered on the island to be recognised for their “regulatory equivalence” under Europe’s AIFMD directive, but these were iced after the UK’s referendum.

“We would have been equivalent to an EU member state, but now we are locked out,” says Mr Harris, who like many on the island feels an urgent need for more clarity. “Business is holding its breath and waiting. This is not great for a centre like Jersey which thrives on transactions.”

His annoyance is understandable, bearing in mind that Jersey services support 88,000 jobs in the EU (ex UK) and 250,000 in the UK, according to research from Capital Economics.

“These are pretty solid numbers and solid indicators of a jurisdiction which provides utility to surrounding markets. But Jersey has not been successful in communicating that,” he complains.

“Our concern is that people stop transactions, like they did in the financial crisis of 2008 to 2011, when the island lost many jobs, as nobody was transacting,” says Geoff Cook, chief executive of the island’s promotional body Jersey Finance.

Nobody is complaining about any lack of business coming into the island today, but a little certainty about Jersey’s future status in relation to the UK would be a welcome development. After all, the island has had much success recently in attracting mining and resources companies, with Randgold Resources, Centamin and Digby Wells among the 15 natural resources businesses to have taken advantage of tax breaks when establishing on the island.

Local legislation and regulatory standards have been confirmed as “top drawer” by both the OECD and IMF, according to Locate Jersey, now adjusting the island’s focus to adapt to a changing market. The aim today is not just attracting companies to the island – there were 25 new inward investment business licence approvals in 2016 – but also to link these to incoming “high value” residents, such as MoneySuperMarket founder Simon Nixon, who moved to Jersey in 2013.

The arrivals reflect a new, younger, more economically active element looking to relocate, in the 40-45 rather than 65 plus age group.

Brevan Howard and Blue Crest are among the 23 hedge fund managers to have set up on the island. These days wealthy newcomers are arriving from Asia, Monaco and Geneva, bringing business acumen and jobs with them.

All change

Carey Olsen’s Mr Dixon concurs that the nature of his island’s business book is changing significantly. “Historically, the bulk of private client business came from London-based intermediaries,” he says. “But some years ago, the island realised it needed to cast its net wider, to the Middle East and sub-Saharan Africa and we are starting to take on work from Asia,” with many of Jersey’s firms now establishing offices in Hong Kong and Singapore. “Political turmoil” around the Arab Springs appeared to accelerate the flow of assets to the island.

Jersey as a domicile for business and assets is also coming onto the radar of wealthy Russians. “That tends to be from Russian citizens who have already moved away from ‘mother’ Russia and chosen to reside in places such as Monaco or London,” though this is still a relatively small part of business, believes Mr Dixon. Jersey is extremely selective when taking on Russian business, he says, because it positions itself as a “brand leader” among international financial centres.

Clients from developing markets are particularly keen to be associated with Jersey’s “long-standing” legal system, says Mr Dixon, with ultimate right of appeal to the UK’s Privy Council. 

“In the rare event that something goes wrong, the client can be satisfied that they will get justice done. That is a comfort.”

According to Stuart Pinnington, head of institutional services at JTC, “there is also a belief in the private client world that Jersey is highest in the pecking order for Trust domiciles,” with most wealthy clients reluctant to seriously consider setting up a structure in a rival jurisdiction in the Caribbean.

Clients with assets of at least $200m to be administered locally are currently showing “steady appetite for very high end family offices,” says Carey Olsen’s Mr Dixon. 

“We have been giving more advice recently about establishing family offices here, with physical presence and employees,” confirms Sally Edwards, partner and global head of private client and trusts at Channel Islands law firm Ogier.  However, JTC points out that some major multi-family office players have tried and failed to establish a foothold on Jersey.

There is also qualified hope on the island that the banking industry may enjoy improved fortunes. “Renaissance is too strong a word, as banking is genuinely not what it was and banking groups are looking carefully at where they are regulated,” says Mr Harris at the FSC. 

“That said, Jersey has had quite a good financial crisis,” he says. Almost 10 years ago, numbers of financial sector jobs fell from 13,000 to 11,000, according to Jersey Finance. Those jobs have since been recovered, partly through a boom in investment funds, now that deposit rates are so low.

The industry expetcs an additional 1,000 positions to be created over the next five years.

But prospects for the banking sector are also improving, favouring institutions which have an investment focus for private clients. Banks including UBS and BNP Paribas, both of whom have taken space in the new IFC buildings, are using the island as a base for selling products to an international audience. 

“Prospects are pretty good,” says Mr Harris. “I have a cautious level of optimism about the sector, tempered by the fact that big organisations with multiple banking licences are a thing of the past…the glass is more than half full.”