Jersey - A "Best of Breed" IOFC
By Lowtax Editorial
07 June, 2016
Those unacquainted with the esoteric world of modern international finance (which is probably the vast majority of people), would probably dismiss Jersey as one of many tax havens, which must be shut down. However, as this feature attempts to show, it is much more than that, and is winning many friends among investors around the globe.
Introduction to Jersey
Jersey is situated off the north-west coast of France in the English Channel. It is the largest and most southerly of the Channel Islands with an approximate area of 45 sq miles. The resident population in July, 2015 was an estimated 97,000. English and French are both official languages and used widely.
As a British Crown dependency, the United Kingdom is responsible for defence and external relations, but by long established constitutional convention Jersey is self-governing in matters of domestic policy.
The island has its own legislative assembly, the States of Jersey, and a comprehensive independent legal, fiscal and administrative system. Apart from the few senior offices in the gift of the Crown, most executive powers are administered by committees of the States. This provides for direct, effective administration, but may be short on checks and balances. However, over many years the States has aimed at creating a well-regulated, efficient financial centre with up-to-date legal, judicial and regulatory frameworks. Broadly, it seems to have succeeded.
Jersey is not a member of the European Union, and Protocol No 3 of the UK's Treaty of Accession to the UK excludes the island from most of the effects of the Treaty, other than those concerning trade in goods. The island does though apply the external common customs tariff of the EU, but, EU (and hence UK) VAT does not apply to Jersey (although the island recently introduced its own goods and services tax, which is currently set at five percent).
Jersey's constitutional position in relation to the EU cannot be changed without unanimous agreement of the member states, including of course the UK. However, at the time of writing, this issue is especially pertinent, given that the referendum on the UK's ongoing membership of the EU is looming large on the horizon. A vote for "Brexit" would cast some uncertainty over the future legal and constitutional status of Jersey within the EU.
Low Taxes, But High Reputation
Obviously, a major reason why international investors are drawn to Jersey is because of its low taxation. Under Jersey's zero-10 corporate tax system, most corporate income is taxed at 0 percent, with a special rate of 10 percent for specified financial services companies (banks).
Meanwhile, individuals in Jersey are taxed at single rate of 20 percent, and social security contributions are also paid by employers and employees.
Notably, there is a lack of other taxes on income and assets which are commonly found in other countries, including capital gains tax, capital transfer tax, inheritance tax or wealth tax in Jersey.
However, there is more to Jersey than just low taxes, and as this feature shows, it is Jersey's expertise in specialist wealth management and financing techniques, its favorable regulatory regime, good international reputation, and high quality financial infrastructure that are drawing investors to the island. This is evidenced by the number of awards that Jersey has won recently in the world of offshore investment and finance.
The most recent of these was dished out at WealthBriefingAsia's Hong Kong Awards 2016 on June 3, 2016, when Jersey was named "Best International Finance Centre." Designed to showcase "best of breed" providers in the global private banking, wealth management and trusted advisor communities, the awards highlight those which have best demonstrated innovation and excellence during 2015.
"It is an honor to have been recognized at WealthBriefingAsia's Hong Kong Awards 2016, which is yet another testament to the hard work Jersey has put in over the past 12 months," said Geoff Cook, CEO of Jersey Finance, the body which promotes Jersey's financial center. "Jersey has not only continued to innovate and attract new business, but has also demonstrated its ability to respond quickly and appropriately in a rapidly shifting global market. This prestigious award cements the fact that Jersey remains a leading jurisdiction globally in terms of transparency and countering financial crime."
Jersey was also named "Best International Finance Centre" at last month's WealthBriefing European Awards 2016, and other gongs collected by Jersey recently include: the "International Financial Centre of the Year" at the annual Citywealth IFC Awards in January 2016; the "Best Fund Administration Centre" at Investment Week's Fund Services Awards in October 2015; and "Financial Center of the Year 2015" by Global Investor/ISF magazine, one of Euromoney Institutional Investor's flagship titles, in their annual Investment Excellence Awards in July 2015.
A Vibrant Finance Center
As we shall see by the statistics given below, Jersey has a vibrant and ever-evolving financial center. Here, we concentrate on Jersey's wealth management offerings, including banking, trusts and investment funds. However, the jurisdiction also now serves growing numbers of international corporate and institutional clients, supporting capital markets activity and institutional funding. Indeed, Jersey has attracted foreign direct investment worth more than USD65bn and distributed FDI worth more than USD75bn, according to a report by advisory firm Investment Consulting Associates.
Jersey is also one of the leading lights in offshore insurance, and in 2006 it was the first international finance center to pass legislation in 2006 to introduce the concept of an incorporated cell company.
Jersey's finance center is supported by a large workforce of advisers, accountants, lawyers, bankers corporate service providers and other specialist professionals with expertise in modern finance techniques. Attesting to Jersey's presence on the world financial stage, this is the largest workforce of any offshore finance center, according to Jersey Finance.
Despite growing global economic uncertainty, more finance sector businesses have reported being increasingly optimistic about the future. According to the results of the Jersey Statistics Unit's recent Business Tendency Survey, which examined activity in the final quarter of 2015, financial services firms were more positive about future employment prospects than at any time since the survey started. Around 60 percent of businesses in the finance sector anticipate that they will increase employment over the next three months.
This optimism seems to have carried through into 2016, with figures released in April 2016 showing that jobs in the Jersey finance industry rose in 2015 by more than 400 for the second consecutive year to reach a total of 13,010, the highest figure since 2009.
Addressing Jersey Finance's Annual Review breakfast event on January 28, 2016, Cook said that these numbers were evidence that Jersey is poised for future growth. "The growth we have seen across our funds, private wealth and capital markets sectors, together with the investment we are making in diversifying and enhancing our banking platform, stands us in very good stead, and we are seeing growing interest from fund managers and family offices in establishing a presence in Jersey."
A Reputable Jurisdiction
It is certainly hard to dispute Cook's assertion that Jersey is one of the world's most reputable finance centers, based on its efforts to counter financial crime and tax evasion. This is something that was recently acknowledged by the European Union, despite its traditional hostility to tax havens, with a report published by the European Council describing the jurisdiction as a "well-established international financial center, with a mature and sophisticated anti-money laundering and counter-terrorism financing regime."
The report, published on May 24, 2016, by MONEYVAL - the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism - also notes that Jersey's beneficial ownership regime puts it at the forefront of the transparency agenda, and that Jersey is compliant or largely compliant with 48 of the 49 Financial Action Task Force Recommendations (2003). This places it in the top tier of jurisdictions assessed under those criteria.
Indeed, an academic paper on the effectiveness of beneficial ownership central registries, published by Jersey Finance in April 2016, concluded that Jersey is one of the few jurisdictions with an existing effective, fit-for-purpose, central register of company beneficial ownership information and is a world leader in this regard.
Jersey is also a cooperative jurisdiction. In April 2016, Jersey agreed to reinforce existing arrangements for the exchange of information on the beneficial ownership of companies. Furthermore, Jersey supports the OECD's new single global standard for the automatic exchange of information between tax authorities worldwide, which was unveiled on February 13, 2014, and has committed to join the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The has completed automatic tax exchange agreements with the United States and with the United Kingdom, as well as with over 30 other jurisdictions.
The Jersey Financial Services Commission (FSC) is responsible for the regulation, supervision and development of the financial services industry in the Island of Jersey for banking, collective investment funds, fund services business, insurance business, general insurance mediation business, investment business, money service business, and trust and company service providers.
Additionally, the FSC is the supervisory body for those sectors that are subject to regulatory oversight of their anti-money laundering and countering the financing of terrorism responsibilities, which includes: accountants; lawyers; estate agents; high value goods dealers; and non-profit organizations.
A Stable Banking Center
Jersey is home to global banking organizations from the UK, Europe, North America, South Africa, Asia, and the Middle East. Jersey only authorizes the global top 500 banks to establish a presence in the island, a policy designed to ensure that only banks of the highest pedigree operate from the jurisdiction. At the end of 2015, there were 32 deposit-taking institutions located in Jersey. They include nearly half of the top 25 banks in the world, by Tier 1 Capital.
Jersey banks had total deposits of GBP126.5bn. Of this amount, GBP51.7bn were sterling denominated deposits and the remainder foreign currency deposits. The Middle East and Gulf regions are becoming an important source of business for Jersey's banking sector, with almost 15 percent of all bank deposits in the jurisdiction coming from these areas as at the end of 2014.
Traditional offshore banking, wealth management and financial planning services for individual investors have been major areas of business for Jersey's banks and the range of banking services provided from Jersey is extensive. These include multi-currency banking, offshore mortgages, investment solutions among other services.
However, the jurisdiction has also become a leading center for the provision of corporate banking services for multinational organisations, financial institutions, companies and firms with cross border interests and activities. For many corporate treasurers, institutional bankers and treasury specialists, fund promoters, brokers and other corporate financiers, Jersey represents an extension of the City of London.
In addition, Jersey's banking sector provides services to support the fast-growing alternative investment funds industry, in particular the real estate, private equity and hedge fund markets, offering, for example, loan facilities to acquire assets and bridging facilities where appropriate.
Depositors into Jersey banks are protected by Depositors Compensation Scheme, which was introduced in November 2009. At present, the scheme provides protection of up to GBP50,000 per person, per Jersey banking group, for local and international depositors in line with international standards.
A Leading Trust Jurisdiction
Jersey regards itself as the leading common law trust jurisdiction and it has an extremely well-developed legal and financial infrastructure for trust management. Jersey has approximately 900 regulated trust company businesses and total trust assets looked after on the island total GBP400bn.
Trust management, particularly for wealthy UK individuals, was Jersey's traditional business. However, the emphasis today has shifted away from the very simple trust and underlying company structure for UK families, to high value and more complex structures involving trusts, companies, limited partnerships and now foundations (see below) for international families.
Jersey trusts are governed by The Trust (Jersey) Law 1984, which codified trust law largely along the lines of English-based common law. "Purpose" trusts were recognized in 1996. Jersey trust law allows for the formation of the following types of trust: Discretionary trusts; Reserved powers trusts; Unit trusts; charitable trusts; non-charitable purpose trusts; accumulation and maintenance trusts.
There is no rule against perpetuities for a Jersey trust, and a Jersey trust may continue in existence for an unlimited period.
The latest amendment to Jersey's trust legislation came into force on October 25, 2013, strengthening the territory's legislative framework and providing greater clarity for the courts, practitioners and those who work with or benefit through Jersey trusts.
An Innovative Jurisdiction Common Law Foundations
Jersey was one of the first common law jurisdictions to introduce the concept of foundations into its wealth management offering. With a long history in continental Europe and other civil law jurisdictions, foundation companies are commonly used for wealth management, and residents of jurisdictions like the Middle and Far East are more familiar with these entities than with trusts, which do not exist in their legal systems. Jersey was the first of the Crown Dependencies to bring in a genuine foundation product.
The Jersey Financial Services Commission began accepting applications for the formation of Jersey foundations on July 17, 2009, when the Jersey Foundations Law came into force. By the first quarter of 2014, more than 250 foundations had been registered in Jersey, around one-third of which were formed to achieve charitable or philanthropic objectives.
A Specialist In Funds
While the Cayman Islands is the undisputed offshore jurisdiction of choice for hedge funds and mutual funds, Jersey has developed a respected funds sector that offers a broad range of fund regimes. However, in recent years, Jersey has carved out a niche as a more specialist funds center, concentrating on alternative funds, including hedge funds, real estate funds, and private equity funds. Indeed, alternative assets now account for about 70 percent of Jersey's total funds business. As at December 31, 2015, there were 1,320 funds established in Jersey with a net asset value totaling GBP225.7bn.
In February, 2004, Jersey introduced "expert" investor fund legislation. This gives qualifying fund managers freedom to offer funds to licensed investors without previously clearing them with the FSC, provided they stick to the guidelines. The Expert Fund regime was subsequently extended to closed-ended investment funds listed on European and other leading stock exchanges including the Channel Islands Stock Exchange.
In 2008, Jersey introduced an Unregulated Funds Regime designed to provide promoters and other fund introducers with the simplicity, certainty and speed they seek when setting up certain types of specialist fund.
Jersey funds may be established as companies, limited partnerships or unit trusts, and be open or closed-ended, providing significant flexibility for investor needs.
Jersey has built up an experienced range of fund administrators, both as part of the services supplied by major custody banks and large specialist fund administration firms, and by boutique groups who can provide bespoke services to meet individual investor needs.
Jersey was the first offshore jurisdiction to offer an opt-in Alternative Investment Fund Managers Directive (AIFMD)-compliant regime back in 2013. This means that a Jersey fund manager can establish different Jersey funds to access the EU market through National Private Placement Regimes (NPPR), or the rest of the world under existing regulations.
The number of Jersey funds marketing into Europe through NPPRs under the AIFMD broke the 200 barrier in mid-2015. By June, a total of 205 Jersey funds had been marketed into the EU through NPPRs, representing an increase of 10 percent on December 2014 levels. 84 fund managers had received private placement authorization in the first half of the year, up 40 percent over the previous six months.
Significantly, in July 2015, the European Securities and Markets Authority (ESMA) recommended that Jersey be granted a 'third country' passport under the AIFMD. Whilst Jersey's current marketing route into Europe via NPPRs is likely to remain in place until at least 2018, it is expected to be in the first wave of "third non-EU countries" whose managers could seek authorization for a passport to market their alternative investment funds to professional investors throughout EU member states.
"Jersey's private placement route into Europe continues to be actively used, with AIFMD not appearing to have stymied fundraising activities for Jersey funds at all. Nevertheless, this announcement from ESMA is a ringing endorsement of Jersey's alternative fund regulatory framework," said Cook. "Overall, this announcement opens up considerable options to managers so that, whatever their strategy and target markets, they can rely on Jersey as a hub from which to offer highly flexible routes to investors in Europe and beyond."
Jersey Drawing Closer To The EU - MiFID II On The Cards?
The FSC is also considering whether the island should seek equivalency with the European Union's Markets in Financial Instruments Directive (MiFiD) II regime. MiFID regulates the activities of financial service providers and market operators in respect of buying, selling, and issuing financial instruments, such as shares and bonds. MiFID II, which is considered an improvement on the MiFID I regime, strengthens consumer protection, increases market transparency, and raises the governance requirements for financial service providers and market operators.
The Commission has said that introducing a similar regime to MiFID II in Jersey would create the opportunity for local firms to export their services to professional clients across the EU. Local financial service providers and consumers are being asked whether they consider this an appropriate move for the island.
However, Mike Jones, Director of Policy at the Commission, observed that the introduction of a MiFID II equivalent regime in Jersey "could lead to significant changes in Jersey's financial services legislation and codes of practice." Thus, the FSC launched a three-month consultation on the proposals on April 26, 2016.
The European Union, Brexit and the Future
In recent weeks and months, many people have begun to ask questions about the future of the Crown Dependencies in the event the United Kingdom leaves the EU, including foreign investors and local stakeholders in these jurisdictions.
As we noted in a recent feature on this issue, opinion is divided among the Crown Dependencies and the UK's other possessions, notably Gibraltar, about the likely impact of a Brexit. Guernsey seems fairly confident that it would be business as usual, but the Isle of Man is more uncertain about the impact of Brexit on its finance center. Gibraltar is positively terrified of the prospect, given its often hostile relationship with neighboring Spain. Jersey, meanwhile, has adopted the stance that it is pointless commenting on the matter, because the highly "speculative views" on Brexit, and because the outcome will be largely beyond its control anyway.
Whatever the result of the referendum, the Jersey Government believes that there is a bright future ahead for the Jersey IFC, and on the evidence of the above, it may well be right.
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