A new wave of regulations is one of the likely consequences of the financial crisis, and the microscope will be focussed on offshore financial centres. During his election campaign, President Obama criticised “corporations that hide their profits offshore”, pointing to Bermuda. Angela Merkel, the German Chancellor, also has offshore in her sights. “We can no longer stand passively by as individual small countries attract financial institutions by ignoring internationally agreed-upon rules,” she said, on a recent trip to Washington DC. In the UK, Gordon Brown, the Prime Minister, has promised “very large and very radical changes” in financial regulation, while his Chancellor Alistair Darling has spoken of “potential problems with overseas territories and crown dependencies”.
At the end of last year, when launching a formal Review into British offshore centres, Darling referred to the Icelandic banking collapse that affected British investors with Landsbanki’s Guernsey branch, and with Kaupthing Singer & Friedlander’s on the Isle of Man. Many who lost money probably did not understand that these banks were outside the UK supervisory system. But the UK Review is much wider in scope: it will examine all crown dependencies and overseas territories with significant financial sectors. This shows how regulatory change can snowball. These are the territories affected: Jersey, Guernsey, Isle of Man, Bermuda, Cayman Islands, Gibraltar, Turks and Caicos Islands, British Virgin Islands, and Anguilla. Thus Caribbean offshore financial centres find themselves caught up in regulatory change that was occasioned by a collapse in Iceland. That’s globalisation for you.
So what exactly will the Review cover? In announcing it, Darling said: “…overseas territories and crown dependencies …attract banking customers with lower taxes – without contributing to the UK Exchequer. But at times of stress, depositors need to know who will compensate them. The British taxpayer cannot be expected to be the guarantor of last resort.” This statement gives the impression that the UK is considering introducing taxation in those territories. Not so, according to later clarification. In subsequent statements the UK?government said the Review would not look at changing the territories’ existing constitutional arrangements, including their fiscal independence and the right to set their own tax rates. This must have come as a great relief to the territories concerned. And as for the UK government’s being guarantor of last resort, depositors in banks in the Isle of Man and Guernsey may have been under a misunderstanding, but surely no despositor in a Caribbean financial institution could make the same mistake.
What then is the purpose of this Review? One possible outcome is that the UK may increase taxation disclosure obligations on offshore centres, something that would help the UK’s authorities hunt down UK citizens attempting to evade tax. The territories may have to send the UK government more information than they do now. The taxation advantages of offshore financial centres may be unaffected, but their confidentiality advantages might be reduced.
If so, this would be a long way from Darling’s statement, but a perfect example of how political rhetoric ossifies over time into a strengthened bureaucracy.
Not only would it be unfair to blame offshore financial centres for the financial crisis (they had nothing to do with it); doing so distracts us from understanding its true causes. We should not allow our politicians to rush to ill-considered regulation in reaction.
As Tim Ambler of the London Business School says in a thought-provoking recent paper for the Adam Smith Institute (The Financial Crisis: Is regulation cure or cause?) improving regulation will not provide more than modest help in future. The important thing, he argues, is that the Bank of England, the FSA and the credit agencies do the jobs they are supposed to do more effectively.
David Sandham, editor of Global Reinsurance