Technical briefing - 13 July 2016

Keep calm and carry on. Brexit reflections from a Jersey perspective

Reflections by Hawksford Director Julian Hayden on Jersey's position post the EU referendum

After the initial volatility, it does begin to look as if one should indeed keep calm and carry on.

The pound has depreciated and the FTSE 250 is markedly down, but the FTSE 100 has recovered and commentaries from the UK financial sector, manufacturing and farming have begun to identify some positives.

Looking at this from the Jersey perspective, in one sense Jersey is quite separate and distinct from the UK and the City of London. But in another sense, Jersey's fortunes are linked to both, and I suggest that there are some important common features for both when considering the way ahead. 

This is a personal view, not an official Hawksford view of the world, and to declare a potential conflict of interest, the view of a "leaver" on the grounds of control, self government and sovereignty and their implications for future opportunity. Others may disagree.

Short term

Brexit was always going to involve short term shock, unsettlement and volatility. One might argue that the UK's economic recovery was already precarious and other economic factors were at play to influence investment markets.  Since the referendum, some calmness has been restored and companies and advisers are beginning to take a view on how the future might look.

Commentators have made the case for the sterling weakness improving prospects for the manufacturing sector. Others have made a similar case for the UK's service industries, which are a vital part of the economy.  

For wealthy foreigners, UK property is suddenly cheaper and still unrestricted while the UK continues to have an extremely attractive tax regime and London remains the world city. Against that, the new uncertainty may delay deals and postpone investment. 

Above all the City has the skills, experience and particularly the infrastructure to be exceptionally well placed to act in global markets and to remain Europe's major financial centre. 

The longer term view

Had the UK remained within Europe, there were a number of major issues on the agenda that would have to be confronted, including a proposed tax on financial transactions and also issues over passporting and Euroclear. The latter two have now come to the fore. 

Passporting is of course the mechanism through which the City sells its services into Europe and the single market, and there will be great competition from Europe to take City jobs.

There will have to be some tough negotiation during the Article 50 process, when it is invoked. MiFID II will be in place in 2018, before the end of the Article 50 process, and this should help both the negotiation process and provide an opportunity for repositioning. MiFID II, bringing with it regulatory equivalence, will be a two-way process giving companies working in countries with regulatory equivalence the ability to sell into Europe or the EEA area. The City has that status and the other countries within the EEA area will need to passport their services into London, which offers access to the capital markets needed by the EU. This surely cannot be ignored, despite references to there being no single market "a la carte" or Angela Merkel's "no cherry picking" comments, that one cannot sell services into Europe without free movement and which might be read as a threat or an invitation to move jobs from the City to Frankfurt and Paris. 

Doubtless both have improved their respective infrastructures over the years, but are they yet a match for London?

It will be interesting to see the developing views of FTSE 100 companies and whether they decide to remain in London or to move.  Doubtless issues including the free movement of labour, capital and goods will be highly material, but so also will be the restoration of political leadership, clarity and political and economic stability.

It might well be argued that given the City's pre-eminence in global capital markets, its depth of expertise, experience and above all infrastructure, it continues to be well placed to lead in global finance and global business, despite immediate issues such as passporting and Euroclear.

It has the opportunity to continue to prosper outside Europe and further opportunities may be opened both in manufacturing and services without EU constraints. London will continue to position itself not just to work in Europe, where the City will continue to be important, but for global business, witness recent developments in Islamic finance and the Renminbi.

The UK and the City will be able to recruit its expert workforce and formulate its own tax system to encourage its own free movement of labour and capital.

So it seems that despite current uncertainties, the City is well placed for the future.

Where does Jersey stand?

There are important analogies with Jersey.

First it is perhaps worth noting that the UK's Brexit decision formally affects the relationship between the UK and the EU.  Jersey's constitutional relationship with the UK will not be affected by the referendum result and future market access for Jersey's financial services into the UK may become easier once unrestricted by EU rules.  Nor should Brexit adversely affect Jersey's rights to access the EU market for financial services since those rights are provided through EU legislation giving "third country" access in respect of which Jersey and Guernsey demonstrate equivalent standards.

Jersey's relationship to the EU in respect of goods and agricultural products is governed by Protocol 3 to the UK's Treaty of Accession. The upshot is that Jersey is within the EU customs union for goods and agricultural products but financial services fall outside Protocol 3.

As far as the finance industry is concerned, Jersey's position is unchanged. However, for other matters the relationship between Jersey and the EU, being based on the UK's own Treaty of Accession, itself depends on the UK's membership of the EU and Jersey's government will need to negotiate to maintain the status quo when the UK leaves.  

Geoff Cook, CEO of Jersey Finance, said:

"Jersey's role as a stable and well-established finance centre should give much-needed reassurance to investors, their advisers and the asset management community in light of this outcome. Jersey is already outside of the EU and maintains strong access to European markets through its broad and robust third country agreements. These also remain unaffected."

Jersey is not inextricably linked to the UK, but it is of significant benefit to the City of London and to the rest of the world. Given its role in the international marshalling and transmission of international capital.  Just as Jersey will benefit from increased global economic activity and will be affected by global downturns, in the same way it will be affected by the strength or weakness of the UK and City of London economies.

There may also be possible short term economic implications for particular sectors of Jersey's finance sector, including the offshore trust industry and its work with wealthy individuals and families and their London connections.  Will London residential property become less attractive as an asset class or will London itself become less attractive to people who are internationally mobile?  There are many factors at play in that area but perhaps currency depreciation will actually act as an attraction for outside investors, bringing purchase opportunities and wiping out significant amounts of new tax charges.

Jersey's funds industry can continue to market into Europe through meeting European standards of investor protection through compliance with the EU's Alternative Investment Fund Managers Directive.

Even if the UK had remained within the EU there were going to be important tax changes affecting Jersey in which the EU figured significantly and which would potentially have a major impact on Jersey's finance sector.  There was always going to be negotiations about those proposals and their implementation. I query whether the position of Jersey's negotiators will have changed significantly as a result of the referendum.

It seems to me that the key points for Jersey, rather like the City of London, are based on a number of qualities: infrastructure, depth and breadth of expertise, the rule of law (with an excellent Court and legal system) and with full banking, accounting and administrative services, all overlaid with economic and political stability (currently perhaps a point of distinction) and setting the gold standard of regulation. 

Furthermore, Jersey's outlook is not just European, but global. It has an established role as an extremely well regulated international finance centre and continues to be well placed to provide a key role in international capital markets, the free movement of capital and in managing the wealth and succession arrangements of international families and their businesses.  It is an ideal location for managing complex international structures and for anchoring the ownership and legal structuring of commercial activity in other parts of the world.

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