In April 2010, the United Kingdom introduced a 50% income tax rate for higher earners. In July 2011, the Alternative Investment Fund Managers Directive ("AIFMD") was formally adopted as European law; it is to be transposed into national law by EU member states no later than July 2013.
As well as substantially increasing regulatory compliance requirements for fund managers in Europe, the AIFMD also imposes remuneration restrictions on fund management professionals. At a national level in Europe, regulation and compliance is increasing and states are seeking to reduce government spending whilst also to enhance revenue-raising measures, both in respect of income and capital.
There have been many reports in the press over the last year or two about the potential for increasing tax and regulation in international financial centres, causing a migration of talent in the fund management industry. For some time many policy makers did not heed this, taking a Christine Keeler approach - "they would say that wouldn't they". Based on the activity we have seen in the Channel Islands recently, there is in fact a very real migration from the cold hard winter of stifling regulation, high taxes and austerity to the summery shores of locations which combine appropriate regulation balancing investor protection with entrepreneurialism, sensible levels of taxation and a comfortable lifestyle.
Channel Islands Attraction
The Channel Islands are attractive to these migrant managers, for the same reasons that are the grounding for the Channel Islands' success as international financial centres. The first of these is stability, which has permitted the growth of a diverse financial services industry in the Islands, exporting expert, high value services throughout the world. Nurturing this is a long-established principle of appropriate prudential regulation (accompanied by the introduction of modern tools for regulatory supervision). Finally, a long-held recognition for fair taxes and effective government can permit both innovation and development, whilst also supporting the weak and most vulnerable in society.
Apart from the Nazi occupation of the Islands during World War II, the Channel Islands have been a stable, safe environment closely connected with the British crown since 1204. Even before the Second World War, Jersey was developing as a safe haven for wealth preservation. Strong, long-lasting relationships with the United Kingdom and more recently with European governments and those further afield have long been promoted based on a sense of co-operative self-reliance.
Financial services regulation has a deep-rooted base in Jersey. Even before the introduction of the Collective Investment Funds (Jersey) Law 1988, the financial services regulator in Jersey used powers under the Control of Borrowing (Jersey) Law 1947 (as it is now known), to regulate investment funds and their service providers in Jersey. The development of the Financial Services (Jersey) Law 1998 and its extension in 2007, to fund services providers, has given the regulator modern and effective tools for regulation of the funds industry. A willingness to co-operate internationally and the implementation of these high standards has established Jersey as a well regarded financial centre.
Jersey is a third country for the purposes of the AIFMD, and the expectation is that the introduction of the directive will allow the Island unrivalled access to European markets, whilst also satisfying the requirements of the European Union for supervision. The approach of the regulator is one of adequate but not over-intrusive or prescriptive regulation which will allow innovation without compromising in quality and standards. Regulation is principles based and the regulator is flexible enough to recognise that different business models may demonstrate compliance in different ways.
Jersey is not a zero-tax jurisdiction. Income tax is charged on local residents at 20%, a rate that has not changed for over 50 years. Wealthy immigrants are subject to a specific "1(1)(k)" tax scheme which has recently changed to encourage more immigration. In response to international encouragement, corporate income tax is zero rated, save in respect of certain financial services businesses and utilities. Migrating fund managers will typically experience the zero rate at a corporate level. In line with many countries, Jersey does not seek to tax capital or income in investment funds, taking a tax neutral approach allowing effective global allocation of capital. Jersey has a well developed social security system to look after the weakest in its own society and also contributed over 0.2% of its gross national income in overseas aid in 2010, a very substantial contribution rate.
When coming to the Island a migrating fund manager will find a sophisticated, international society, stable and confident, with an international outlook keen to take its place in the world. Services are modern and sophisticated, an enviable lifestyle is available with high quality schooling, excellent sporting facilities, a wide array of beaches and internationally regarded restaurants, and access to the UK and Europe is an easy, short flight or ferry-ride away.
Jersey's government is keen to encourage inward investment and the establishment in the Island of enterprises which have both a small footprint (in terms of demand for both human capital and other resources) and provide high value services. Typically fund managers are a perfect fit. Incentives may be available and there is a designated government representative to assist high value migrants through the process of local licensing, business establishment and establishing a home.
In conclusion, for those fund managers finding that they are currently facing the prospect of a winter of increased regulation and taxation, it may be time to consider a migration south to a welcoming business friendly environment.
As originally appeared in Finance, Offshore – Autumn 2011