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26 August 2014
The thriving financial centres of the Crown Dependencies are an essential part of the UK economy, a fact not lost on the coalition Government. Chris Bound and Susan O’Leary report
The new coalition administration came into power with a promise of a “bold, reforming government that puts fairness back into Britain”. The question is, how will this promise affect the relationship with the Crown Dependencies - namely Guernsey, Jersey and the Isle of Man? We are optimistic.
The exact nature of the relationship between the Crown Dependencies and the UK is often misunderstood. Although part of the British Isles geographically, the Dependencies are not part of the UK, or the EU. A lieutenant governor represents each of the Dependencies, prima facie, as the head of an independent state and, as such, the Dependencies are not represented in the UK Parliament. The Dependencies remain steadfastly loyal to the Crown, with the Ministry of Justice (MoJ) acting as the key relationship and communication conduit with the UK Government.
The title ’Dependencies’ is somewhat of a misnomer itself and offers a misleadingly negative connotation. The Dependencies are democratic, fiscally independent and self-governing. The Dependencies are, however, reliant on the UK, through the MoJ, to represent them internationally.
A perceived conflict arises, balancing the interests of the UK with the Dependencies’ interests. What may be beneficial to one may be detrimental to the other. A recent example is the ongoing debate in relation to the Alternative Investment Fund Managers’ Directive. The Dependencies are being assessed as ’third countries’, yet dependent on the UK fighting their corner, even though the UK would not itself be considered a third country.
The Crown Dependencies are economically strong, well-regulated international financial centres that have not only proven to be resilient in the global economic downturn, but have added, and continue to add, significant benefits to the UK economy. As illustrated in the Foot Report of October 2009, the Dependencies upstream significant capital to the UK, providing essential liquidity. Surely, without their contribution, the financial crisis in the UK would have been significantly more painful.
A recent paper by Professor Jason Sharman of Griffith University in Australia points out that, by routing investment through international financial centres such as Guernsey, investors can use institutions with lower transaction costs, resulting in larger capital flows and more efficient use of this capital in developing countries. He also contends that small- and medium-sized businesses from developing countries can also often access capital much more efficiently through the stable and well-regulated platforms in international finance centres than they could domestically, while for foreign investors they ease the path of entry into developing countries.
The new Lord Chancellor Ken Clarke, when asked in the House of Commons by Tory MP Andrew Rosindell about the previous government’s “rather negative attitude towards the loyal subjects in the Crown Dependencies”, said the new Government gives a high priority to ensuring that the relationships with the Channel Islands and the Isle of Man are completely satisfactory. He further remarked: “I only raise the possibility that we will have a look at the allocation of responsibilities between departments to find which allocation best suits both Her Majesty’s Government and the governments of the Crown Dependencies”.
When visiting Guernsey in November 2006, Clarke spoke favourably of the contribution of the Channel Islands to the UK, stating that the free movement of capital around the world was essential for finance industries and pointing out that “the fact that Guernsey has been able to build that economic base is in part because of the opening up of capital”. Interestingly, he also stated that he welcomed competition between tax rates.
As the Foot Report demonstrated before it, the House of Commons Justice Committee Report, issued in March this year, was highly favourable to the Crown Dependencies. It is refreshing to note that the Justice Committee Report encourages clearer and better understanding between the UK and the Dependencies, stating that UK Government departments conducting business with the Dependencies should “be made aware of the constitutional position of the islands, their essential independence from the UK [and consider] that secondments of officials between UK Government departments and the Crown Dependencies would help to increase mutual understanding”.
The MoJ itself even admitted that it had a tendency to step outside its remit, in particular with regard to new legislation, rather than focusing on matters of a constitutional nature.
So far, those who have taken the time to review the nature of the relationship between the Dependencies and the UK have offered positive endorsements. With the new Government due to respond to the Justice Committee Report over the coming weeks, there is every reason to believe its view should be in line with the Lord Chancellor’s earlier favourable take on the Dependencies.
We believe that once the new Government invests the time to assess the degree to which the Dependencies are beneficial neighbours to the UK, as opposed to being dependent upon it, favourable and long-lasting change will result.
Chris Bound is a senior partner and Susan O’Leary is an associate at Collas Day