Offshore: Jewel in the crown

Michael Foot's external review of the offshore finance industry recognised the importance of the crown dependencies to the UK. Russell Clark and Graham Parrott look at the report's recommendations for the future

Commissioned by the UK chancellor following last year's Pre-Budget Report, October saw Michael Foot deliver his final report on the offshore finance industry.

The independent review was undertaken as a result of the global economic downturn and was to focus on a number of areas that impact on the future sustainability of the British crown dependencies (Guernsey, Isle of Man and Jersey) and six overseas territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands).

The report's remit included management and international co-operation, transparency and taxation as well as the role of these jurisdictions in the global financial services industry.

The review recognises the importance of the crown dependencies to the UK. Together, the islands provided net financing to the UK of $332.5bn (£199bn) in the second quarter of this year. The crown dependencies also pay over £300m a year in investment management fees to the UK.

It underlined the positive fiscal contribution to the UK market in terms of flow of funds and the liquidity this has brought, something the Channel Islands have been saying themselves for some time now.

The crown dependencies' regulatory regimes were also praised, with other offshore centres encouraged to follow suit with better financial planning, including the building up of cash reserves.

All the other jurisdictions have had to take on significant state borrowings. None of the crown dependencies have done so as a result of pursuing a policy of building up reserves during the recent period of economic growth.

We have chosen to move ahead of the pack of our international rivals and so have compliant tax and international co-operation regimes that are well above the minimum standards. The report acknowledges that we must benefit from improved international acceptance as a result.

Lord Bach, Ministry of Justice minister for the crown dependencies, said in an official Treasury statement that the report showed "the crown dependencies have much to be proud of in terms of meeting high international standards" but that it "is clear that there is no room for complacency and we are confident that the crown dependencies will continue to lead the way in terms of meeting new standards as they evolve".

As far as regulation is concerned, the review rightly points out that Guernsey and Jersey have a good story to tell, one that the overseas territories highlighted in the report can learn from.

On the topic of taxation, the review draws what should not be a surprising conclusion, that tax, or the lack of it, is an important motivator for business coming to the islands.

It is interesting that this report was published so soon after the announcement that some EU countries did not consider our zero-10 regime to be compliant with the spirit of the EU Code of Conduct - although there is no direct reference to this.

The political and economic climate is different to how it was when we started down this path in 2002. But it is no different to that when we were awarded white list status by the G20, or signed Tax Information Exchange Agreements (TIEAs).

We should adapt the regime to address the concerns while at the same time retaining as much as we can of the international competitiveness that was at the heart of the original proposals.

The report has recognised that changes to the islands' tax systems, which reduced their international competitiveness, would result in a lack of business flowing to the UK.

Given that the review was commissioned by the Chancellor of the Exchequer, the significance of the islands' contribution to the economy of the UK will not go amiss.

It is not without issues that we need to consider carefully, however. We are advised to consider the introduction of a financial ombudsman for added protection for consumers. This is a sensible idea and plans for such an ombudsman in Guernsey, for example, have already been formulated.

Other recommendations made to the crown dependencies include maintaining the quality and extent of economic planning; continuing to meet international standards on tax transparency, refining financial sector regulation and ensuring that deposit protection schemes can be understood by depositors.

Michael Foot has produced a report which, like so many other external reviews of the crown dependencies, is broadly very positive. It does make suggestions for the authorities here to consider and makes the point that we cannot rest on our laurels or become complacent. We hope that the report will go some way to assist in educating those who do not understand what it is that we in the crown dependencies do, or how well we do it.

Russell Clark is deputy managing partner at Carey Olsen and Graham Parrott is a tax partner at Ernst and Young.