Finance in Jersey, Channel Islands 1946-2003
Created | Updated Dec 7, 2010
The finance industry in Jersey owes much of its success to the decision of the 1940s to make Jersey’s taxation a flat rate of 20 pence in the pound (or as it was then 4s in the £1).
Jersey was therefore a low tax rate zone, and despite numerous political disclaimers, a tax haven. This was not in the sense of being a place where no taxes were paid, but it was literally a haven from jurisdictions where a much higher rate of taxation applied.
The post-war labour governments of Atlee and later Wilson saw punitive rates of income tax introduced in the UK, alongside which were also death duty (taxation on estates), capital gains taxation (taxation on capital movement). This meant that Jersey offered, in the first instance, a refuge for wealthy individuals, and a steady migration began, strictly controlled by numbers per annum and amount of wealth. Initially the island was seen as a domicile to safeguard personal wealth, but by the 1990s a new style of wealthy immigrant had appeared, one who was not content to retire quietly to the island, and keep apart from island affairs, but as entrepreneurs, looked to become involved in the burgeoning property markets, either as major landlords or property speculators.
Along with the so-called 'rich English residence' came the merchant banks, English solicitors, and the rise of the 'financial advisor'; soon after, by the 1970s, the high street banks had set up offshore subsidiaries. At this time, the finance market was not particularly well-regulated, and as a result of various speculations, the Walford merchant bank went bankrupt. This was the only bank to suffer such a calamity. However, until the stricter regime of the mid 1990s, the island has seen a succession of financial scandals involving misappropriation of money, usually by individuals, but occasionally by corporations.
The 1970s and 1980s saw a rapid build-up of shell companies, with nominee shareholders and often nominee directors, which were used primarily as vehicles for tax avoidance, a state of affairs which continued until the early 1990s, when controls became tighter.
The new companies law of the 1990s and the raft of controlling legislation in its wake, saw this diminished as nominee directorships became less attractive owing to the massive increase in responsibilities and liabilities of directors. Nominee shareholdings were still held, but the lucrative market in directors' fees had diminished. In place of the limited company, the new financial vehicle for tax avoidance was the trust, and by the 1990s, trust companies predominated the market.
An oddity in the legislation of the 1990s was the 'fast track' implementation of the limited liability partnership law. The LLP had been introduced as a financial vehicle by various American states, but outside of America had not received much interest from governments. Large accountancy partnerships, under increasing pressure from the high cost of litigation, were seeking to introduce similar restraints in the UK, and it was probably to bring pressure on the UK government more than any other reason, that they successful lobbied the Jersey government to introduce this, with one firm, Price Waterhouse Coopers, doing much of the initial law drafting. The prospect for Jersey was increased business. However, once the UK Government had timetabled similar legislation, most of the interest in this evaporated.
In the late 1990s, the Labour Government in the UK commissioned Anthony Edwards to examine and report back on the financial regulation in the Channel Islands. As a response to this, and also as a general measure to improve the standing of Jersey as an offshore finance centre, the Jersey Financial Services Commission was set up as an independent body apart from the States of Jersey, and a massive volume of legislation was introduced to counter money laundering, bring in 'due diligence' checks on new and existing business ownership and control, and generally tighten up the controls on the management of trusts and trust companies.
The effect of the rise of the finance industry impacted on many aspects of island life. As the finance sector grew, immigration also increased as financial institutions sought qualified staff from outside the island; as they sought generous remuneration for the wealth they created, this led to an overall increase in prices. This inflation was most seen in the housing market, which saw a massive rise in house prices, and which was completely untouched by the problems with negative equity that so beset the UK housing market of the late 1980s. Prices on most commodities tended to rise, and this began to impact on other sectors of the economy, which also saw a large migration of the workforce into the lucrative finance sector.
The main result for agriculture, already under pressure of market forces, was a migration of workforce out of the industry as farm labour became scarce, and farmers themselves decided to give up a poorly paid profession with long hours and uncertain income for the steady income of the finance industry.
The effect on tourism was much greater. The rising prices of local goods and services tended to erode the price differential between Jersey and the UK, so that visitors saw less incentive to come to the island in preference to cheaper continental holidays. The finance sector also drew off labour from tourism, so that staff were harder to come by without increasing wages, and either reducing profit margins or pricing tourist accommodation out of the market. Finally, the rapid rise in property prices, and the demand for local accommodation meant that it was often more lucrative to close hotels and restructure or rebuild them to get annual income from the property rental market in place of seasonal income from tourism.
Various mechanisms, such as the regulations of undertakings law, were introduced by the States to both restrict immigration and reduce the flow of manpower into the finance sector; however, the reduction of other sectors meant that despite these efforts there was still a net flow of labour into finance, and still a steady rise in immigrants.
One other unwelcome effect of the finance sector was the boom in property and rental prices which fed off the increased salaries of employees; the main result was that a substantial part of an individual’s salary, often a third or greater, went to pay landlords or property developers.
Returning to the development of the finance sector, the years from 2000 have seen further increases in legislation to regulate the market, much of which has involved anti-drug trafficking and money laundering measures, as well as anti-terrorist measures introduced after the attacks in America of 11 September, 2001. In bringing this legislation, Jersey has been aware of constant scrutiny by international bodies such as the OECD, and the need for offshore finance markets to be better regulated than ever before. There is a greater awareness of the fickle nature of the market, and how confidence can easily be lost - an outcome which would be an economic disaster for the island. The price of high finance is now constant vigilance.
April 2002 saw pressure brought upon Jersey by the UK Government over signing to an EU tax transparency package, which also contained future implications for the removal of particular tax practises such as the Jersey Exempt Tax company, which was still lucrative, and the foundation stone for many Trust packages.
The Economics Professor Dr Mark Hampton, who has often taken a keenly critical viewpoint of offshore centres such as Jersey (where he grew up), appears to be of the opinion that Jersey is facing its greatest challenge yet, and that the financial centre there will collapse under pressure from the EU (with the removal of harmful tax competition) with a consequent implosion of the local economy, and, in particular, the housing market. How this could be avoided, and how the island may develop its economy in alternative ways, does not seem to form any part of his deliberations, which is unfortunate, as he has provided much more constructive comments to other Islands as ISISA1 Secretary.