A Bold New Role For IFCs

To understand this potential new role for IFCs, we need to rewind a year to the World Economic Forum in Davos 2018, and the antagonistic dynamic between protectionism on the one hand and globalisation on the other was a clear theme.

Back then, German Chancellor Angela Merkel pronounced that ”protectionism is not the answer” to a prosperous future for global markets, whilst Indian Prime Minister Narendra Modi concurred, suggesting that resisting globalisation  was one of the three biggest threats to global economic success.

A year doesn’t seem to have made much of a difference – in fact, fast forward to Davos at the beginning of this year and, if anything, the temperature seemed to have  soared yet again. Although the theme of Davos this year was ’Globalisation 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution’, in reality, globalisation was still in the dock.

Rather than fronting an unequivocal endorsement of globalisation as a force shaping a positive and aspirational future, Davos this year succeeded in sparking debates around the impact globalisation may or may not have on inequality, climate change, migration and tax. Those attending were cast as elite private jet-setters, detached from the ‘man on the street’, and as the champions of big multinational corporates. President Trump, Prime Minister May and President Macron weren’t even there, leaving Japan and Germany to fight globalisation’s corner.

Challenging assumptions around globalisation as an unquestionably positive force has become somewhat symptomatic of our time, an example of the kind of world we now live in where debates are driven by populist sentiment, sometimes at the expense of rational thought.

That is understandable, because it impacts us all – what we buy, how we buy it, how we interact with each other, where we work. There’s no doubt that having proper discussions around globalisation is an absolutely vital part of modern economics, business, politics and society. It involves complex questions that do not just revolve around trade, but impact on culture and society too.

Understanding Globalisation

Overall, the impact of globalisation is fairly poorly understood.  It is often accused of benefitting the wealthy at the expense of the poor, designed solely to make the rich richer – and yes, there is truth in the assertion that its impact on the wealthy is greater than on the poorest in society.

However, it is still the case that globalisation has helped pull hundreds of millions of people out of poverty; it has provided jobs and employment; and it has provided opportunity for those who might not otherwise have had any. A World Bank study, for instance, has suggested that the number of people in developing countries living in extreme poverty  fell from more than 50 per cent in 1981 to 21% in 2010, despite a 60 per cent increase in the population in the developing world (The World Bank, The State of the Poor, 2017).

It’s also vital that we have proper discussions about what the alternative means for each and every one of us. Just as globalisation is a defining global force of our time, the counter dynamics of protectionism and global fragmentation are very real trends too – Capital Economics and the World Trade Organisation both note that global trade-restrictive measures have more than tripled since 2010. In addition, HSBC’s global Trade Navigator survey (HSBC, 2018) found that 63 per cent of firms think governments are becoming more protective of their home economies.

The current high-profile tensions involved in US approaches to trade are a case in point – not only is China-US trade having a major impact on global markets,  the US is also mulling over imposing tariffs on about US$11 billion in EU goods in response to the EU bloc’s subsidies on Airbus.

And then of course, there’s Brexit, a phenomenon that has its roots in protectionism.

But what does this all mean for our future livelihoods, career prospects and the cost of goods and services? There are  myriad complex questions bound up in all of this - political, economic and social – and it is all relevant to international finance centres (IFCs). In fact, I would contend that IFCs have not only a key role to play in all this, but a role that is likely to become more important over the coming years.

Dichotomies

The world today is very much one of dichotomies – remain and leave; populism and globalisation; rich and poor; small business and multinationals – with proponents of each constantly shouting at each other through Twitter and other social media forums.

Discussions at the STEP Global Congress in Vancouver last year provided some evidence of how this is playing out in a financial services context, particularly when it comes to global standards of confidentiality and transparency.

What became clear through those discussions was that, as a result of the combined impact of all of these dichotomies, we are now at a pivotal point in history in terms of global standards and a coherent, joined-up vision.

The EU is making moves to extend its own AML directive and maintain its own list of non-cooperative countries, for instance, while the G20, Financial Action Task Force (FATF), and the Organisation for Economic Cooperation and Development (OECD) continue to set their own agendas. Not to mention individual nations forging ahead with unilateral policies.

The OECD’s Common Reporting Standard (CRS), for example, was intended to be the global standard for information exchange and cooperation - but the US decided to opt out of in favour of its own Foreign Account Tax Compliance Act (FATCA) rules.

Then there are the different approaches to registers of beneficial ownership. Some jurisdictions, such as the Crown Dependencies and Canada, maintain registers where beneficial owners are tracked and verified by corporate service providers, so that whilst the register is not public, records are up to date, accurate and reliable.

There is a marked difference between that approach and attitudes in the UK and EU, with the UK in particular being quite vocal about wanting to move towards a position where public registers are the global standard, regardless of whether the information they hold is verified or accurate.

Within Europe itself there are some real conflicts between the drive towards transparency and the privacy rights of citizens under General Data Protection Regulation (GDPR) rules, and in the wildly varying moral arguments around complete transparency for the wealthy but complete privacy for the average man on the street.

The result is a fragmented, complex tapestry of initiatives and agendas, all by and large politically driven, with something of the same end goal but with confusing and sometimes conflicting overlaps.

All this prompts some significant questions. What does all this mean in terms of nation state control? Who is responsible for global standard setting and where should industry look for global approaches towards tax and transparency?

We are sitting on the precipice of a new era not just for the EU and UK, but for global trade more widely. So where do IFCs fit in?

A New Role

For the forward-thinking IFC, there’s a really crucial role here that goes beyond being passive conduits of international capital.

For those IFCs that can articulate that their role in the world is a vital and positive one; who can show that they are working effectively with stakeholders in key markets around the world to set common goals; who can evidence their efforts to fight financial crime; and who are proactive in findings new ways to meet the challenges posed by political, economic and social fragmentation, then there is a very bright future.

If IFCs don’t realise this opportunity, are not bold, do not assert their value, and do not ask themselves fundamental strategic questions about their long-term future in providing a middle ground that can encourage collaboration, debate, and cooperation, they may well find themselves side-lined at best or steamrollered at worst by larger nations, organisations and trade blocs.

With IFCs providing trillions of dollars of inward investment to support the lives of millions of people around the world, helping to finance the construction of schools, roads and hospitals in countries in all corners of the globe, and doing so in a way that ensures public and private sector capital is put to work in the most efficient way possible, for IFCs to not be part of this future would be to the detriment of everyone.

Geoff Cook
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is an Advisor and non-executive director to a select number of Family Office, Private Capital, and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also Chair of Apex Financial Services (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.