Brexit And Britain's IOFCs: A Journey Into The Unknown?
By Lowtax Editorial
03 May, 2016
Naturally, the debate about whether or not the United Kingdom should remain a member of the European Union has focused largely on the impact of a "Brexit" on the economies of Britain itself and of the EU and, to a lesser extent, the wider world. But how would a Brexit impact the islands and territories which are still very much tied to the UK, and whose important financial services industries depend on their current relationships with the EU? In this feature, we examine how the authorities in Guernsey, Jersey, the Isle of Man and Gibraltar are facing up to the possibility of a Brexit.
The official line of the UK Government is that Britain is better off as part of the EU, and that life will be intolerably miserable for Britons on the outside, as the UK stands isolated, without international influence and in terminal economic decline. It is a view shared by much of the international community, including the OECD, and the EU itself.
Given that the UK also has four offshore territories which also depend on access to the EU markets in certain ways, a Brexit would therefore, under these projections, by extension, be equally ruinous for them. Or would it? It seems much may depend on the particular relationship each jurisdiction has in place with the EU.
Status: Crown Dependency
Relationship with UK: Largely self-governing, with UK responsible for external affairs.
Relationship with EU: Guernsey forms part of the single market but is outside the EU fiscal area.
Worried about Brexit? Believes it will be unaffected.
Guernsey is trying to look on the bright side, and has said that despite the uncertainty caused by the possible Brexit, it remains a haven of stability. However, it is clear that representatives of the island's financial services industry have fielded some awkward questions from investors recently.
The Chief Executive of Guernsey Finance, the promotional agency on behalf of the island's financial services industry internationally, Dominic Wheatley, revealed in March 2016 that a regular question to emerge from meetings held to coincide with the launch of the promotional agency's new representative office in Hong Kong was how Guernsey would be impacted by a Brexit.
As we shall see below, unlike some in neighboring Jersey, Wheatley thinks that Guernsey's status as a "third country" in the EU will stand the jurisdiction in good stead in the event of a Brexit. "The people we spoke to in Hong Kong appreciated the fact that Guernsey's position with respect to the EU is very clear – we're a 'third country' now and we'd still be a 'third country' in the event of a 'Brexit.' They understood that there would be no change in our relationship with the EU, regardless of how the UK referendum goes."
Guernsey's Commerce and Employment Minister, Kevin Stewart, added: "From the meetings I had with businesses in Hong Kong, it was clear that there was significant interest in South East Asia in doing business with Guernsey. Therefore, they were pleased to hear that whatever the referendum result, there would be no change in Guernsey's relationship with the UK, the City of London, or the EU. At this stage we can offer certainty, something that is absolutely vital for business."
International ratings agency Standard & Poor's doesn't share the confidence of Guernsey's finance industry representatives, however. It believes that both Guernsey and Jersey could face future ratings downgrades if the UK chooses to leave the EU. This, the agency said in February 2016, reflects "further downside risks" facing the economies of the two jurisdictions.
Status: Crown Dependency.
Relationship with UK: Largely self-governing, with UK responsible for external affairs.
Relationship with EU: Jersey forms part of the single market but is outside the EU fiscal area.
Worried about Brexit? Refuses to comment on speculation.
By contrast, the Jersey Government has been largely tight-lipped on the subject of the EU referendum and the possibility of a Brexit. One of the only official utterances has come from Treasury and Resources Minister, Senator Alan MacLean, in response to the recent ratings downgrade by S&P, which, many have suggested, had much to do with political and economic uncertainty: "Their opinion around the likelihood of Brexit… is not within our control, and there are many speculative views on that issue. I have every confidence that our economy will continue to grow, regardless of the outcome of that referendum."
Speculation there may be. But the speculation is difficult to avoid, especially the fear that Brexit could "devastate" the islands key financial services industry, as one Jersey politician has warned. Quoted by the Jersey Evening Post earlier this year, Deputy Mike Higgins observed that although Jersey is not a member of the EU, its relationship with the EU is enshrined in Protocol 3 of the UK's accession treaty, and this would have to be renegotiated if Britain left the bloc.
"In that case, Jersey is going to have to re-negotiate to keep the relations we have and it will be an almost impossible task – there are 28 member states to deal with and we are just a minnow," he said, before going on to warn that: "The finance industry employs 12,000 people in Jersey. If the UK wanted to leave and we can't renegotiate our agreements with Europe, then it will devastate our island."
Unsurprisingly then, Jersey's Government is keen to maintain the territory's current relationship with the EU in the event that Britain votes out in the referendum. And, according to an interview that Chief Minister Ian Gorst gave to International Adviser, the Jersey Government has "made it clear" in meetings with various UK departments of state that this is want it wants "whatever the British public decides."
However, it seems fairly clear now that the Jersey Government's official position on the Brexit is that there is no point commenting on a future development which is out of its hands and currently subject to such intense debate. "[Y]ou're asking me a question that is a live debate in the United Kingdom," he told International Adviser. "The British people are going to have to decide what they want to do."
Isle of Man
Status: Crown Dependency.
Relationship with UK: , Self-governing, with UK responsible for defense and foreign affairs.
Relationship with EU: The island forms part of the EU single market and VAT area but is otherwise not part of the EU fiscal area.
Worried about Brexit? Yes, very much so.
The Isle of Man has published an interim report on the potential consequences for the island if the UK votes to leave the European Union. However, even though it is 77-pages long, the report concludes that the outcome of a Brexit would be difficult to predict.
Chief Minister, Allan Bell, said: "A Brexit vote on June 23 would take the United Kingdom and the Isle of Man on a journey into uncharted territory, so there are many questions that just cannot be answered at this stage. Much would depend on what the UK could negotiate in place of EU membership, and how the island as a Crown Dependency would fit into that new relationship. If the vote is to leave the EU, there will be a need for us to stay very close to the UK negotiators to ensure that the best interests of the Isle of Man are known and protected."
The island's limited relationship with the EU allows for free trade in most areas, including goods, agriculture, and fisheries products with the EU. According to the report, these sectors could therefore be likely to experience the most significant effects of a Brexit, although a lot will depend on what new relationship with the EU the UK and the Isle of Man can negotiate. Crucially however, the island's current relationship with the EU does not extend to service industries, such as the finance sector, which generate the bulk of its national income and employment.
Bell concluded: "The report will hopefully give some food for thought for those people who live in the Isle of Man – or perhaps for Manx people currently living in the UK – who may be eligible to vote in the referendum, and for all who want to understand what Brexit could mean for the island."
Status: Overseas Territory
Relationship with UK: Largely self-governing, but a colony of the UK.
Relationship with EU: Entered EU with UK and has representation in EU Parliament. However, does not belong to the EU's VAT, Common Agricultural Policy, or common external tariff regimes.
Worried about Brexit? For sure, but probably more worried about Spain!
Of the four territories, the most fearful about a Brexit is Gibraltar. This is because, as effectively a member of the EU, albeit on different terms than the 28 member states, Brexit could leave the Rock, in the words of Deputy Chief Minister Joseph Garcia, "politically exposed and at the mercy of Spain."
Gibraltar's preference is, however, to remain part of the EU. And this is largely because its finance industry has several "passporting" rights giving access to the EU market for various financial services.
"EU membership has been an important factor in the development of Gibraltar's economy," the Government explained in a statement to the Foreign Affairs Committee of the UK House of Commons.
The statement explains how Gibraltar has embraced the challenge of compliance with EU regulations and directives and it stresses that access to the single market is important to Gibraltar's economy and its cross-border traders.
Gibraltar also benefits from its involvement in the EU in many other ways, Garcia pointed out, including EU funding, the EU format identity card which serves as a travel document, and the EU health card, which has allowed Gibraltarians access to healthcare in other parts of Europe.
However, the Gibraltar Government also warns that it is essential that the United Kingdom guards against attempts by Spain to take advantage of the present situation by advancing its claim to Gibraltar. Short of contesting its claim on Gibraltar's sovereignty militarily, the Spanish Government has used all sorts of administrative and bureaucratic obstacles to make life as difficult for Gibraltarians as possible. One high profile example was the introduction of more comprehensive immigration checks at the border between Gibraltar and Spain in the summer of 2013.
But for Garcia, the territory's choice is stark: "We will either continue in the European Union under the terms negotiated by the Prime Minister or we will be negotiating our exit."
At the time of writing, more than six weeks before the EU referendum is due to take place, it is impossible to say with any certainty how a Brexit would impact Gibraltar and the Crown Dependencies. Indeed, it is even hard to predict the outcome of the vote itself. For while the polls suggest the "remain" campaign is leading, there have been a sufficient number of undecided voters all along which could tip the balance on polling day. It seems fairly evident though, that, due to their unique relationships with the EU, Gibraltar and the Isle of Man are the most worried. However, to suggest that life would go on as normal in any of these jurisdictions in the event of a Brexit seems a little far-fetched. Surely, there would be some impact at the legal, regulatory and economic levels, even if it is small and more short-lived than the doom-mongers in the UK and the EU are suggesting.
It is quite ironic that the citizens of Guernsey, Jersey and the Isle Man will have no say in the outcome of a vote that could profoundly affect their economies for years, perhaps generations to come. But the hard fact is that this is something they can do nothing about. And while Guernsey and Jersey at least are fairly confident they would continue to thrive as offshore financial centers if Britain votes out, it is probably fair to say that all four are praying hard to avoid the Brexit, and the difficult decisions that may entail.
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