Financial services have suited Guernsey well and Guernsey has suited financial services. However, the winds of change are blowing. Catherine the Great is purported to have said, “A great wind is blowing and that gives you either imagination or a headache”. Guernsey needs imagination.
The seeds of the industry were sown in a very different era to today. Egregious UK personal taxation and Sterling exchange controls in the 1960s and 1970s meant that a small, self-determining rock of 24 square miles nestled inside the Sterling banking system was ideally placed for what today is called international finance.
For Guernsey, it was a godsend to stumble across a source of large scale employment knocking on our door that does not require physical shipment of goods and did not recognise national boundaries.
Fifty years ago, when the roots of today’s financial industry first pressed into Guernsey’s soil, the island perhaps had more cowboys than sheriffs. From those beginnings, financial services have advanced, become well regulated and illicit activity is not tolerated. Guernsey is an attractive, safe and reputable place to transact international financial business
Finance and associated services are among the most remunerative industries on the planet. So we have seen our standard of living rise relative to the rest of the globe in a way that our grandparents could not have conceived. We are amongst the wealthiest communities on Earth. We have been fortunate indeed.
Yet change is afoot. Merely twenty years ago, Guernsey still had relative fiscal and regulatory autonomy. As a small, self-determining jurisdiction we could set our own tax rates, write our own regulations, attract the business that we wished and be nimble in adapting to a changing international landscape. Much has changed since the new millennium dawned.
Some islanders, including some of our law makers, still think we can write our own regulations and set our own tax rates. They are mistaken. Financial services regulation is an international agenda with international norms. If you wish to access international markets you must satisfy international requirements. And international today means anywhere beyond our shores. Regulation is set in Brussels, Basel, Washington and London. It is not set in St Peter Port.
Similarly, our bosoms may swell with pride that we can manage our own tax affairs. Yet as the zero-10 debate a decade ago and the recent negotiations over the EU’s latest “blacklist” showed, our tax structure and tax rates are not in our gift alone.
Our tax structure must be acceptable to technocrats across the globe. To counter the EU’s latest onslaught, Guernsey pledged by the end of 2018 to propose a corporate tax regime that is “acceptable” to the EU. Ostensibly this is a matter of companies here demonstrating their activities have “substance”. But based on history, it seems hard to believe that zero will remain an acceptable rate. If so, our corporate tax rates will rise just as those of our international competitors, most particularly the UK, are falling.
In regulation, our position is similar. We retain an ability to have parallel regulatory regimes to appeal to different investors with different requirements, but international norms must still apply. The old ability to “arbitrage” between regulations and between other countries has long gone.
We do not write the rules of the international regulatory game or the tax game but we wish to be allowed to play. To be permitted on the pitch we must play by the rules of others. The inconvenient truth is that our advantage is narrowing. Whilst other explanations may be proposed, this is the main reason that financial services in Guernsey, and hence our economy at large, has not revived as meaningfully as the recovery in the wider global economy.
And now we have Brexit. Some proclaim that Brexit may present a ray of sunshine for the island in the face of these darkening clouds. Yet this seems like false hope. Far from being an opportunity, Brexit risks the UK stealing the remaining sandwiches from our lunchbox. Once unshackled from the EU, the UK too will be able to introduce parallel regulatory regimes. Further, it would require little more than the stroke of the UK Chancellor’s pen to attract back to the UK much of Guernsey’s financial business.
All is not lost. The UK will be slow moving and bureaucratic. The UK regulators appear to have the bit between their teeth and show few signs of wishing to be “commercial” post-Brexit. And the UK tax code is so complex that any stroke of the pen is simply too complicated to put into effect. Heaven forbid that the UK might find a leader akin to US President Trump who is willing to tear up historical tax norms and introduce a sweeping reform. Our lunch could then be out of our hands very swiftly.
The promotional body Guernsey Finance and our politicians are quick to emphasise that Guernsey retains many advantages. It has depth and breadth of financial infrastructure and expertise. It has a financial regulator that is open for business. And it is nimble in grabbing the opportunities as they arise. Those advantages seem unlikely to erode fast, so finance won’t be gone in the blink of an eye. However, right now it is a stretch to see it prospering for more than a finite period. We should not talk ourselves down, but we should not be blind to reality: the industry as a whole is not what it was, and the sectors showing durability are reaching maturity.
As an island, we have grown accustomed to being relatively wealthy. Such wealth comes from the high margins from finance business and the consequent high salaries in our pockets. Guernsey could adapt to new industries but few alternatives offer similarly high margins and high salaries alongside sufficient scale to employ the seven to ten thousand people involved with finance, directly and indirectly, today. There is much talk of “Fintech” and broader IT. Both are attractive and, as of finance of old, would suit the island well. But the impact of these industries is to make people and their costs obsolescent. Neither seems likely to grow to be of sufficient scale to substitute for the existing finance industry.
We need multiple new niches, not one. But they are hard to find, and the costs and benefits hard to assess. Coordinated and welcoming governmental policy, as well as imagination and a little luck, will be required. The alternative is that our wealth relative to the wider, global economy goes into decline.
