Jersey braces itself for global crisis fallout
Saturday 25th October 2008, 10:50AM BST.
JERSEY will be caught in the crossfire of a renewed global attack on offshore tax havens.
The Island has been mentioned in numerous news reports this week following a high-level meeting of OECD countries in Paris on Tuesday. Both the French and German finance ministers are calling for a clampdown on tax avoidance and stricter measures against countries with banking secrecy, particularly Switzerland.
The States of Jersey’s director for international finance, Martin de Forest Brown, said the backlash was an inevitable consequence of problems in the global economy, with governments choosing targets removed from their problems at home. ‘We will see lots of media headlines talking about offshore finance centres “like Jersey” and we will be endlessly caught in the crossfire,’ he said. ‘Behind the scenes we are in a different position than the headlines suggest. But there is definitely an up-tick in pressure on offshore jurisdictions. It is now on the political agenda.’
In fact, during Tuesday’s meeting Jersey was one of six offshore centres singled out for having actively negotiated tax-exchange agreements. And OECD Secretary General Angel Gurría called for ‘a clear political recognition’ for those offshore centres that had made progress.
Pictured: Barack Obama has backed a Stop Tax Haven Abuse Act
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This is just the beginning. When will Jersey wake up to the fact a Finance industry predicated on tax avoidance is not a sustainable basis for an economy. Work hard on Plan B or face collapse in less than five years.
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I cannot see this happening, what business do we get from the USA for starters and when will they start practising what they preach and get their own house in order? If it wasn’t for careless lending in the USA then we wouldn’t be going into economic meltdown for starters. Some of the scandals that have emerged from the USA have been appalling and it has all boiled down to lack of regulation.
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Sara
Unfortunately, it is jurisdictions like Jersey that provide the off-balance sheet structures necessary to make the poor lending practices of the US viable. No doubt the US must accept blame, but Jersey needs to understand that it can’t be a tool in the practice and then not accept the consequences. All financial institutions will be facing tougher regulations, and this will reduce the need for offshore havens like Jersey. Jersey needs to diversify to survive. The sooner we accept that, the better.
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Well put Dompycat. The UK has been named as the source of many of the dodgy financial vehicles used to make the recent financial collapse a reality. I wonder how many of these originated in Jersey?
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I am in management in finance and I am telling you now that none of my clients have any connection to dodgy lending in the USA or the UK or associated SPVs. They are all outside these jurisdictions totally so the USA have no basis to follow up my client base.
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US securitisations have historically used Cayman incorporated SPVs. Jersey SPVs are generally used for UK or European deals where the underlying debts are in those countries. Most of the UK mortgage backed securitisations have I believe used onshore vehicles (Northern Rock / Granite being an exception). The different time zones mean relatively little structured finance work comes to Jersey from the US as far as I am aware.
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Channel Island SPVs may not have been used directly to hold US subprime mortgages but they certainly have been used to hold them indirectly via other asset backed securities. Also the whole ” Originate and Distribute” model of loans has led to a dramatic collapse in lending standards and structures set up and administered over here are certainly part of that. We just don’t know how many SPV’s over here are collapsing as you rarely see it announced in public. Besides Jersey legal and admin firms were keen to extend their practices to the likes of Cayman and Dublin to capture some of this racey business. Don’t delude yourself that we haven’t played our part in an unprecedented misallocation of capital over the last 6-7 years. The new Unregulated Funds regime will allow us to try and gain more of this “quality” business.
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I’m not in “Finance”, I’m just a retired saver/depositor who doesn’t understand half the terminology being used. What I do understand is that I pay tax in UK, and Tax in Jersey, and if I’m really lucky [after a couple of letters] I eventually get double taxation relief once someone’s read my Tax return properly.
What I don’t understand is how the various “suits” in UK and IOM managed to bring down KSF_IOM, where I unfortunately had deposited funds. As I understand it, there are questions abroad such as …
“Can the Chancellor explain why the Isle of Man branch of Kaupthing was not included in arrangements with ING when, 10 days beforehand, the Isle of Man portion of Bradford & Bingley was included within the deal with Santander?”
All a bit above my head, I’m afraid. I don’t drive a Porsche, I’m over 60 and, basically, just a saver with a 5-digit lost deposit in IOM.
Good luck for the future of the JSY Finance Industry: I think you are going to need it.
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Sara, as they say in the markets I think you are “talking your own book”. You are unlikely to get anybody over here conveying an objective view on things given that in a small economy,they will be in real trouble if the banks and the shadow banking industry get reigned in. Jersey and the other offshore centres have done very well over the last few years out of disintermediatiation in finance products and markets. Unfortunately as one of the directors of the Federal Reserve recently said, they didn’t realise the risks and moral hazards of this business model. Maybe not deliberately , but we have played our part. And we didn’t have to have set up vehicles that directly held mortgages to people in Florida or Arizona, who with a bit of judgement could never meet their obligations, to achieve this. As a number of practioners have said, rather than spreading risk to those who can best shoulder it, the Offshore finance centres have (ok unwittingly) played their part in actually spreading the contagion of instruments that can’t be valued due to their opaqueness. Just as in the US and UK, our regulators have been well behind the curve in terms of understanding the effects of these instruments.
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Sara. My key point is that as regulations and tax avoidance rules are tightened, the need for offshore havens will reduce. Perhaps you can explain why diversifying the economy is a bad idea?
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Unwittingly? Come on guys and gals, when you invent/use one of these winged pigs you know exactly what it’s for, don’t you? And if not, why not? Nice to see so many active players coming forward to join the debate here. Pity this never gets into the main stream to form part of the public discussion about Jersey’s present, it’s future and the Missing Plan B. I am sure most of the non-finance people in Jersey would love to know what the hell the rest of you have been up to. As, it would seem, would you. What a shady little pond we all swim in.
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Richard the policy of the JFSC as regulator is not to allow securitisation issues by Jersey companies to retail investors. That being the case I find it hard to understand your concern to speak up for and protect the sophisticated institutional investors which are the only ones that do get offered these securities. These hedge funds, banks and other financial institutions should be able to look after their own interests employing scores of financial experts to evaluate these securities and if there calculations are wrong then so be it – these are investments that can go down as well as up. There are lots of parts of the finance industry in the Channel Islands that can be attacked on various grounds but its involvement in securitisation would not to date seem to be one.
A good example in my opinion of objectionable business were the hundreds and hundreds of property unit trusts that were established in recent years to take advantage of a tax loop hole in the UK stamp duty legislation that has now been closed. Billions of pounds worth of UK properties were transferred in to these structures with Jersey trustees in the main. That blatant move to avoid paying UK stamp duty on a technicality will have cost the UK exchequer hundreds of millions of pounds and such tax avoidance to many people will be morally objectionable and should be seen as bad business for Jersey. The business was however very profitable for the Island so you will hear little objection.
No wonder the UK are to start charging Jersey residents for healthcare !
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A shady little pond? Something tells me that these comments are coming from people who either very inaccurate imformation about Jersey’s finance industry, or they come from the outside and envy it’s success.
The USA has messed up all by itself, pointing the finger will not get away from that fact.
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My last comment has a word missing. What I mean to say is that the information about Jersey’s finance industry is inaccurate and it is obvious by the comments like ‘shady ponds’.
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The arguement that we shouldn’t be worried about institutions selling some of these securitisation products between themselves doesn’t hold here as events have shown. There have been serious repercussions as banks and other related institutions refused to lend to each other as they don’t know who holds the non-performing loans or will have to pay out on the CDS “insurance”. Banks have such an important role in the economy. Even Alan Greenspan is back tracking on his prior beliefs that these financial innovations had brought us to a new financial pardigm where risk was better allocated to those who could best tolerate it. I think there will be concerted action to tighten up how financial organisations use off balance sheet structures. Jersey may well come out of such a process looking good compared to the other offshore centres.
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Sara you’ve said on a number of posts that you don’t have clients with these securitisations,SIVs, Conduits etc. But you’ve extrapolated from your experience to the whole of Jersey’s Finance Industry. We all know that the securitisation programme that has played a part in the biggest collapse in a UK bank to date was set up and administered over here. Namely Northern Rock and Granite. I find it hard to believe that we don’t have a significant number of other such structures over here.
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This is Jersey not Guernsey. Northern Rock collapsed because of panic from the public and bad publicity from the UK media. I wish people would get some real facts together first before throwing punches at Jersey all the time.
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Granite was set up and administered in Jersey. I could name the lawyers and I could name the administrators. Northern Rock in the UK collapsed and was nationalised. I wasn’t talking about its little branch office in Guernsey and I would have thought that was reasonably clear.
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How can anybody top the plain good sense of Bruce Labey? Our salvation is not 20:20 and the so called ‘finance industry’. A bout of the financial equivalent ‘winter flue’ and all the ‘dirty money’ will be off to Switzerland.
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Northern Rock collapsed because it was reliant on the wholesale sale money markets rather than retail deposits for funding its business to a greater extent than virtually any other financial institution in the UK. When the credit crunch struck that method of financing dried up and eventually customers lost their nerve and a run on the bank started as UK retail depositors sought to get their money out. It had nothing to do with the Granite structure which actually provided Northern Rock with cheap funding. I don’t work for Mourants (it being a matter of public record that they look after Granite) but as far as I am aware the Granite structure remains and the noteholders are being paid in full. It is the responsibility of the UK authorities to monitor and regulate UK financial institutions such as Northern Rock.
By far and away the vast majority of RMBS and CMBS structures referencing UK mortgages were kept onshore for tax reasons using English SPVs – Jersey has had a very limited involvement I can assure you.
The problems that the world financial system has all come back to the property bubbles that were allowed to be created and are now deflating worldwide and most spectacularly in the US so far. It can only be a matter of time before Jersey prices follow those in the US, UK, Ireland, Spain etc and crash massively as there will be no return to the cheap credit of the last seven years and a good thing too. The price of a home is simply what a willing buyer and seller agree and since most buyers need a mortgage and those will now require normal deposits and sensible salary multiples then the price must fall. A home should first and foremost be a place to live and, if you want to, to raise a family not an investment priced out of the reach of large swathes of the public by greedy buy-to-let investors and property speculators. Rising property prices are quite simply a means of distributing money from young to old with only the very wealthy or those able to downsize and realise their profit benefiting.
The States needs to stop trying to prop up an unsustainable property market that benefits the few and let prices fall.
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Granite was used to expand their loan book much quicker and gain market share while the organisation had a low ratio of retail deposits to loans advanced via a very small branch network. The fact that the loans were off the main books allowed Northern Rock to side step the discipline of Capital Adequacy rules in the UK. Yes Granite has effected the organisation’s solvency but not in a straightforward way. The rubbish stuff is still on Northern Rock’s balance sheet and has default rates twice the average of its competitors. The quality assets had to go to replenish as mortgages were redeemed, a process known as “feeding the beast”. The ability to “push more product” via securitisations led to a business model that could not survive a loss of confidence. That’s how Granite caused problems. I appreciate its not easy to grasp but even Adam Applegarth , the ex-CEO of Northern Rock, has admitted as much in his submissions to the select committee of the House of Commons.
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Maybe only Enron and Northern Rock had Jersey links, of the high-profile cases of ethically adventurous corporate practice going wrong, but nevertheless, the whole area of business is becoming an insecure base for our economy. Just because it has been so successful, offshore assistance with tax-efficient financial planning, or whatever else you may wish to call it, is now taking enough to hurt away from countries with the muscle to fight for their money. Now everybody is at it, it has become worth the bother for them to turn off our money supply at the mains, and where America leads, the rest of the West has a habit of following.
“Finance” has been the best earner we could ever have, but any assumption that it has a safe and promising future, going forward from where we are now, is reckless in the extreme.
As the age of cheap oil also draws to an inevitable close, tourism and agriculture will once more become competitive with far-off places. We need to be turning our eyes to their revival and regeneration.
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People seem to forget that offshore does confer some benefits to onshore.
I read somewhere that tax havens account for about $200bn lost revenue per annum worldwide (thats the effect of of all tax havens against all onshore jurisdicitons). To put that in perspective, the US alone has a $3 trillion military budget.
Whether these figures are right or not, on-shore jurisdictions are competing with each other. So whats bad for one is often good for another (e.g. where an offshore service is not avaialable for the domiciles or business of one onshore jurisdiction, those people are more likely to move themsleves and/or their businesses to an onshore jurisdiciton where the offshore service is available to them… thereby benefiting the place they move to by paying some tax and doing business there).
On top of that, there is of course the argument that if all offshore doors were closed, many mega-tax payers would simply move to jurisdictions with less onerous fiscal policies, with the outcome that onshore would continue lose the same if not more tax revenue.
p.s. I think David is right that Jersey may come out of this looking good… not only because of the above, but also because it is becoming a well regulated place to do business in its own right, especially when compared to other other offshore jurisdictions. Its not all about the tax here anymore.
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I sit here and read all these comments from people in the finace industry and wonder where they all have been hiding over the last few months. Any way as a NON finacial person I say that Jersey is in a good position as far as regulation goes but as far as Banks or trust companies go i bet some of those who have cmmented on this site will most likly be unemployed by New Year. On the subject at hand, world governments will stomp thier feet and complain about off shore islands but as they too have billions of pounds invested away in these off shore islands i doubt anything will come of this.
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There is the widespread assumption that everyone who invests offshore is hugely rich and a tax evader. My wife and I are British but live in Uganda and this email reaches you from Kampala. As freelance journalist and photographer, ourearned incomes are laughably small by UK standards, and our UK terraced house brings us a rental so far below UK tax threshold, that we have not been required to complete a UK tax return for 5+ years. We also do substantial voluntary work in Uganda. Yet we invested a large part of our life savings (£25,000)in the Jersey-based Lloyds High Income Fund in 2000. So as a volunteer athletics coach, I will train Uganda’s female 800m champion tonight, with worry and anxiety in my mind, because of the offshore credit crunch. Kind regards, Kevin
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