If the UK votes to get out of the EU, how will this affect offshore jurisdictions with links to Britain such as the Cayman Islands, Gibraltar or Jersey?

The 23 June UK poll on whether the country should stay in the European Union or get out has so far overwhelmingly focused on how any vote will affect the UK and its links with major countries. But the referendum also matters for a group of offshore jurisdictions with links to Britain.

These jurisdictions include Guernsey, Jersey, Isle of Man, the Cayman Islands, Gibraltar and the British Virgin Islands. They fall into two categories: Crown Dependencies (Isle of Man, Guernsey and Jersey) and British Overseas Territories (Caymans, BVI, Bermuda, Falklands and Gibraltar). There are subtle distinctions in their relationships with the UK, which may have some influence on how serious a vote will be for them. One IFC with particular concern is Gibraltar, because of fears an EU exit could encourage Spain, which has had historical designs on Gibraltar, to try and absorb it. Gibraltar yesterday issued a report warning that Brexit could damage its interests.

At stake is whether these international financial centres will be harmed or even benefited by UK voters’ decision. This is a sensitive matter, it seems, because the bodies representing the financial sectors of the BVI and Isle of Man declined to comment.

In broad outline, the IFCs that have been willing to comment think uncertainty ahead of the vote is a potential drag on business and that if there is a Brexit vote, this might affect transactions for the period following the result and the UK’s eventual departure. (A Brexit vote triggers a process under EU treaty law, lasting about two years, for the UK to disentangle itself.)

More positively, uncertainty about the UK’s relations with the European continent, not to mention wider geopolitical tensions in Asia and the Middle East, may paradoxically play into these IFCs’ hands because of their reputation for stability, a number of industry figures said. Another point is that as none of the UK’s offshore “cousins” – with the exception of Gibraltar – are EU members anyway, a Brexit vote wouldn’t dramatically affect them, other than perhaps in subtle ways.

Recent opinion polls in the UK suggest the vote will be close, prompting complaints that those arguing for the UK to stay in the European bloc have been too negative in trying to instil fear among the electorate rather than make a positive case. Business opinion in the UK, at least according to a poll of members by the Confederation of British Industry, found that only 5 per cent of respondents think the UK should leave the EU. Based on evidence of comments emailed to this publication in statements and press releases, most wealth managers hope the UK stays in the EU. (See here.)

Channel Islands
“Jersey’s relationship with the UK will remain unchanged: the island has had constitutional, fiscal and judicial autonomy for the last 800 years and will continue to do so,” Richard Corrigan, deputy chief executive of Jersey Finance, the body that promotes the island’s financial industry, told this publication. 

“I think that our position is already clear: We promote Jersey as having a legal, tax and regulatory framework which adheres to all the key international standards, and I think that investors and intermediaries are aware of our strengths. We will continue to monitor Brexit, Jersey’s government is liaising closely with the UK government, and whatever the outcome we will remain one of the world’s best-regulated and competitive IFCs,” Corrigan said.

“The business links between the UK, Europe and Jersey are so historic that it is unlikely they will be affected in the short term, whatever the outcome of the referendum. Jersey has a £225 billion [$318 billion] net asset value in funds under administration, and more than half is channelled into assets in the European Union. We add value to the EU and would expect to continue to do so,” he continued.

An early indication that uncertainties about Brexit could be a problem came recently when international rating agency Standard & Poor’s cut its long-term foreign and local sovereign credit ratings for Jersey and Guernsey by one notch from their highest possible level of “AA+” to “AA”. The agency said growing regulatory pressures on IFCs, as well as uncertainties linked to the EU referendum, were factors.

Jersey Finance’s Corrigan is bullish: “This vote is about the relationship between the UK and the EU – not about the relationship between Jersey and the UK. In 1972, Jersey negotiated a deal which governed our formal relationship with the EU. If the UK were to vote to leave the EU, Jersey’s government would have two years to negotiate an agreement which enabled us to remain competitive. I won’t deal in hypothetical scenarios, but what I can say is that Jersey’s industry, regulator and government remain alert to global changes. We have been a leading IFC for the last 50 years, and will continue to adapt in order to remain competitive.

“Markets don’t like uncertainty, but any uncertainty in the lead up to the vote is universal. Our job is to ensure that business is aware that Jersey remains independent and open for business, and that we are ready to adapt – if required – in order to remain competitive,” he added. 

Gibraltar is worried
Gibraltar is an interesting case because as well as being a British overseas territory that shares a border with Spain, it is also part of the EU, having joined the European Economic Community (as it was called at the time) under the UK in 1973.

This IFC is worried. Yesterday, the government of Gibraltar, in a report about EU membership and Brexit sent to lawmakers in the UK parliament, noted that in 2013, UK prime minister David Cameron (who is in favour of the UK staying in the EU) had to intervene when Spain imposed heavy border controls between itself and Gibraltar. The risk of Spain exploiting Brexit to seize Gibraltar is a concern. 

“It is important that there should be clarity as to the rights the British Government will protect and defend for Gibraltar in the context of its own negotiations if the referendum decides for leaving the EU,” the report said, adding that the UK must guard against attempts by Spain to take advantage of the present situation by advancing its claim to Gibraltar.

“EU membership has been an important factor in the development of Gibraltar’s economy,” Gibraltar’s government said, arguing that Gibraltar has embraced the challenge of complying with EU regulations and directives. It said access to the EU’s single market is important to Gibraltar’s economy and added that commerce in Gibraltar, and indeed in the neighbouring Spanish region, relies on free flow through the border.

Although it is part of the EU, Gibraltar is outside the customs union and VAT area and is exempted from the Common Agricultural Policy. It is also outside the EU’s Schengen Area (in which persons can travel without a passport). Gibraltar's government and parliament are responsible for turning EU law into local law. There is no option for Gibraltar to cancel its EU membership separately from the UK. Gibraltarians count as British nationals for the purposes of Community law. 

Planning ahead
Marcus Leese, who is a partner at Ogier, a prominent offshore law firm, was asked whether his clients in places such as Guernsey have been worried about the Brexit vote. “It has been raised in the broad context of financial planning and in the context that it means there are additional layers of risk associated with investing into the UK. It has not been raised in terms of the attractiveness of Guernsey and Jersey as opposed to other offshore centres,” Leese, who has been at Ogier for 17 years, said.

"The biggest single impact for Jersey and Guernsey will arise not from a specific issue from general uncertainty of Brexit's impact,” Leese continued. "Guernsey and Jersey are not part of the EU, but they are part of the EU Common Customs Union (to which the UK is a signatory). If the UK leaves the EU, Jersey and Guernsey's membership of the Common Customs Union would be lost,” he said. 

"We would have to find another means of ensuring freedom of movement of goods in the EU,” he added. 

On the upside, a rise in global uncertainties - not just caused by a Brexit - will put a premium on jurisdictions that are seen to be stable and secure, such as the Channel Islands, he said.

"We offer stability irrespective of the outcome of a referendum."

Jurisdictions such as Guernsey and Jersey, he said, have already worked hard to build trade links outside of their traditional areas such as the UK. Recently, for example, Guernsey Finance opened an office in Hong Kong.

Leese also argues that as far as these IFCs are concerned, global pacts such as the Common Reporting Standard, and bilateral treaties and arrangements such as around transfer of tax information, will not be affected. Also, ESMA, the group of European securities regulators, has said Jersey and Guernsey have been recognised as eligible jurisdictions under the umbrella of the AIFMD's fund passporting regime. 

Caymans, BVI
Both the Caymans and BVI have sought to broaden their market appeal in recent years, with the BVI, for example, setting up offices in Hong Kong to promote its services to Asian investors. Such a move arguably makes sense regardless of whether the UK chooses to quit the EU or not.

It is important to grasp a subtle difference between the British Overseas Territories and the Crown Dependencies, in that the latter are not constitutionally bound under the ultimate authority of the British Parliament (known constitutionally as the Queen-in-Parliament) but are ruled by the Queen alone, in her capacity as their local lord. This is evident from their banknotes, on which the Queen wears no crown.

Parliament in London can extend UK law to, for example, the BVI (whether it likes it or not) by way of an order in council. This is the manner in which Britain commands these territories to block transactions with countries such as Iran and North Korea, and indeed the authorities in London are often criticised for issuing such orders for the colonies slightly later than they do for the UK, giving rise to potential timing opportunities for the sanctioned parties.

Guernsey, by contrast, does not have to obey acts of Parliament or orders in council, although the States of Guernsey can ask the UK to extend one to cover Guernsey if they so choose. These waters are muddied further by the fact that the island, like the Isle of Man and the UK itself, has no written constitution. 

All Crown Dependencies have their own relationships with the EU but these are always couched in terms of Britain having the overarching responsibility for their inclusion. 

Guernsey has a special relationship with the EU, which is described in Protocol 3 to the 1973 Treaty of Accession when the UK joined the European Economic Community, which morphed into the EU in 1992.

According to the protocol, Guernsey has access to EU countries with regards to physical exports without tariff barriers. Other EU rules do not apply to it but it passes some of the EU's laws voluntarily [source: States of Guernsey]. The European Commission has informed the European Parliament that Jersey is "within the Union as a European Territory for whose external relationships the United Kingdom is responsible." Again and always, the wording of such relationships mentions the UK, although it makes it far from clear what the relationship of these territories would be without the UK.

Editor’s note: We are keen to obtain more views from the industry on this topic. Do please contact me on tom.burroughes@wealthbriefing.com