Bergerac to bank deposits

Steve Smith reviews Jersey and explains what this crown dependency has to offer the international investor

Mention Jersey to someone not au fait with the world of offshore finance and it is likely to conjure images of shady transactions and bronzed millionaires. Truly, the 80s fictional detective Bergerac left a dubious heritage in forever immortalising Jersey as a cross between San Marino and the Bronx.

The truth about this island, which sits in the bay of Normandy, geographically closer to France but politically tied to the UK, is unsurprisingly less dramatic than the fiction. There are quite a few millionaires able to circumvent the island’s otherwise strict residency laws on the grounds that their expenditure and tax contributions are good for the economy. The weather though is at best equivalent to northern France and so is hardly a rival for Monaco in the affections of the rich and famous.

Jersey is one of the UK’s three crown dependencies, alongside Guernsey and the Isle of Man. This unique and longstanding relationship with the British crown, which will be 800 years old in 2004, has provided political stability. Jersey’s government is responsible for home affairs, whilst the British government has traditionally spoken for it in the international arena. Significantly Jersey retains power to set domestic tax arrangements, which allowed the creation of an attractive tax regime, propelling its growth
as a financial centre.

In place of tourism and agriculture, financial services has dominated Jersey’s economy for 40 years, a longevity that eludes its rivals. The key advantage to expatriates of Jersey is its tax neutrality, according to president of the Jersey Bankers Association, Hans Baerlocher. Interest on Jersey bank accounts and investments is paid gross of tax, rather than being subject to standard rates of income tax if left in the UK. The island also has no capital gains tax.

However, though advantages still remain, tax differences between onshore and offshore are informally diminishing. Nor is there much of an opportunity to secrete
illicit earnings on offshore savings anymore.

“Tax planning is legal, proper and right. Tax evasion is none of those things and has never actually been in Jersey’s remit or any of the banks as far as I know,” says Geoff Roberts, head of offshore products and offers at Lloyds TSB Offshore.

The IBM Business Consulting Services’ European wealth and private banking survey, published in May 2003, predicted what most insiders readily accept: that traditional tax-based business is unlikely to continue to sustain offshore centres.

Many working in Jersey have been trying to play down talk of tax advantages for a while now. Phil Austin, chief executive of Jersey Finance, the Island’s promotional body, agrees with the overall conclusion of the report. “You’ve got to be fleet of foot. You’ve got to be modern. You’ve got to have good laws and legislation. You’ve got to have strong regulation. You can’t just base it on low tax anymore, it’s got to be a whole package.”

Trevor Falle, managing director of wealth manager, Ashburton, agrees: “We’re competing on the international stage and Jersey is neither the advantage it once was from
a tax point of view or, on the other hand, a disadvantage. We’re competing head on really.”

On a more positive note, the IBM survey asked respondents to rank which centres would be the most important locations in three years’ time. Jersey was ranked sixth behind Singapore, Switzerland, Luxembourg, the UK and Hong Kong. This is an extremely credible showing, reinforcing the island’s perceived status amongst the world’s leading offshore centres.

If not tax then what?

“Quality as far as we are concerned is one of the absolutely sine qua non,” says Senator Terry Le Sueur, president of Jersey’s Finance and Economics Committee. “Quality of regulation and quality of expertise if we are to maintain our position at the forefront of offshore jurisdictions.”

Competition for customers offshore is intense and the clear advantage Jersey once had over its competitors in all areas has now been reduced. It has a fairly small insurance industry, whilst chief competitors the Isle of Man and Guernsey have extensive specialisations in this field.

That said, the island is still the first choice of headquarters for most of the leading banks. Jersey is home to nearly all the British high-street names such as HSBC Offshore, Lloyds TSB Offshore, Abbey National Offshore, The Royal Bank of Scotland International and NatWest Offshore. Banks not in the world’s top 500 need not apply to set up in Jersey.

The island is rightly proud that it twice refused a licence to BCCI, which collapsed worldwide in the early 90s. “A top 500 bank means it has a particularly high level of financial stability,” says Helen Hatton, deputy director general of the Jersey Financial Services Commission (JFSC), which is responsible for regulating the industry. “It’s top 500 by its tier one capital, which is its safest class of assets. So very stable, solid institutions are the ones that come within our licensing policy.”

This policy helps customers feel secure that by dealing with Jersey they are only dealing with quality institutions. Nevertheless, the JFSC retains considerable powers, similar to those of the Financial Services Authority, on occasions when something goes awry.
That said, Jersey lags behind the Isle of Man in introducing a depositor’s protection scheme, in case a bank does fold, and appointing an ombudsman. Promised for
a number of years, there is now movement on these initiatives and the regulator promises that they are down to the ‘nuts and bolts’ stage.

For Malcolm Corrigan, press and PR manager for Abbey National Offshore, which has had offices in Jersey since 1987, the attraction of Jersey is the ability to bank offshore with a brand you can trust, which employs specialists who understand and can assist with the needs of expatriate life. “Well over 90 per cent of our customer base are Brits. We attract Brits because we are a British brand name, of British heritage and are committed to customers’ financial security and prosperity.”

HSBC Offshore is one of a number of banks that has committed its long-term future to Jersey and is in the process of building a new head office in the island. “An expatriate is looking for control, accessibility and portability in offshore banking arrangements,” says Mike Finnegan, the bank’s head of wealth management.

Geoff Roberts adds: “If you are a wealthy expatriate and you have come from a town in the middle of nowhere in the UK, banking there is fine but you may be the only expatriate and they don’t have the opportunity to become as aware perhaps as others might be of the particular style of service that you want.”

Lloyds TSB Offshore has also recently committed its long-term future to Jersey by agreeing to domicile its holding company there after a three-way discussion involving Guernsey and the Isle of Man. From the Bank’s own perspective though it remains equally committed to all three islands.

With expatriate centres on Jersey and the Isle of Man, expatriates have a free choice of where they would prefer their account domiciled. If they have no preference, Lloyds tend to feel that their staff in Jersey have more experience dealing with expatriates based in Europe, whilst Isle of Man staff deal with expatriates in the rest of the world. This is an important point for those choosing an offshore bank. Most have branches in multiple jurisdictions and there is no set formula for the specialities staff in each organisation will have developed.

Although it is prudent for many British expatriates to continue a relationship with their existing bank, it should be a time to consider all the options. Depending on where they are going to work, some expatriates choose a provider with expertise in the region they are relocating to.

Lindsay Bateman, head of private client services and group marketing for Standard Bank Offshore, the offshore headquarters for the African-based Standard Bank Group, says: “We often have people contacting us because they know that not only can we assist from an offshore perspective, but we can also facilitate the purchasing of a property or provide a significant domestic network to meet their financial requirements whilst they are in South Africa, or potentially other parts of the globe.”

Always read the small print
Jersey has seen its retail funds base decline in recent years, with business now largely driven by institutional and high-net-worth clients. However, the island is planning to introduce new fund classifications to make Jersey domiciled funds clearer for investors to understand, with non-recognised funds divided depending on whether they are suitable for ordinary investors, expert investors or institutions.

“I think it is tremendously important that investors do read and understand the investment literature,” says Helen Hatton. “The Jersey regulatory regime has strong investor protection provisions including restitution powers in cases of mis-selling or misleading practices. Fortunately we very seldom have to exercise them. Notwithstanding the duty the Laws place on advisers to give ‘suitable advice’, it is very important that investors are informed if they are considering high risk/high return-type products.”

“Where an investor is considering investing in funds that are potentially high risk, we are proposing a flashing amber light system requiring the investor signs an investment warning. And the warning is really blatant. It says I understand that this is a high-risk fund. I understand that I may lose all my money. I confirm that I am a sophisticated investor.”

Conclusion

Jersey, then – high standards not high crime. The last word goes to Phil Austin: “We believe that all the major international financial institutions are here in Jersey offering services to foreign nationals around the world. If you add to that the level of regulatory control there is, we believe Jersey is uniquely placed as a home for expatriates.”