London Calling: But Should The IFCs Listen?

Growth And Symbiosis, But No Love Song

The development of successful international finance centres in Britain’s quasi-independent territories, such as Jersey, the British Virgin Islands and Gibraltar, is testament to the historically intimate (but not always mutually loving) relationship between them and the United Kingdom.

For much of the mid and late twentieth century, the home nations were struggling with post-war debt, rapid decolonisation across most of their remaining empire, hostile labour relations and industrial sclerosis. In 1979, the year that English punk rock band The Clash released London Calling, those earning over £20,000 per annum (£120,000 in today’s money) were handing over a staggering 83 pence in every marginal pound of income to the Chancellor of the Exchequer.[i] Indeed, effective marginal rates for some of the highest earners reached 98 per cent earlier in the decade. Unsurprisingly, their semi-detached constitutional position, including the ability to set their own taxes, combined with political stability unmatched in Westminster, made the Channel Islands a banking safe haven for rightly worried wealth owners in Britain in the 1960s and 1970s.

After Margaret Thatcher came to power (also in 1979) with an evolving, experimental and radical set of supply-side policies – including privatisation of what were heavily nationalised utility and manufacturing sectors combined with a massive political push for both mass home and share ownership, Britain saw two decades of economic rejuvenation and vibrancy. Real economic growth in the five years before Westminster’s first female prime minister was 1.0 per cent per annum rising to 2.3 per cent in the decade after – peaking at 5.2 per cent in 1987.[ii]

The previously sleepy streets of the City of London had their wake up call on 27 October 1986. The ‘Big Bang’ changes to the regulation of key financial markets simultaneously broke the costly and inefficient closed shop of trading floor jobbers and brokers, opened the door to international players and handed the United Kingdom global first mover advantage in electronic trading. The impact was quick, substantial and transformative for the Square Mile and the regenerating Docklands. Over the course of the twentieth century, London reinvented itself from being the world’s largest goods trading port to the preeminent financial trading centre by its end.

As the United Kingdom grew as a nexus for international finance, the crown dependencies and overseas territories used their powers of self-legislation and self-administration to provide innovative complementary legal structures to support cross-border trade, investment and mobility. Their historical and constitutional position made (and continues to make) them attractive: they share the English legal tradition of common law and its predictability; and they retain right of appeal to the twelve Caucasian (of which eleven are male) justices of the Supreme Court that sit in London as the Judicial Committee of the Privy Council. Although poorly documented and largely unresearched, the links between the City’s Magic Circle law firms and the offshore practices are extensive – while the major London banks and accountancies have all established a presence somewhere on the islands.

Britain Is Becoming A B-Side Economy

The value of the relationship between the United Kingdom and its dependencies and territories has its limits – and potentially finite shelf-life.

First, despite its history and rhetoric, Britain is not a global economic powerhouse.

England, Scotland, Wales and Northern Ireland have a combined population of 67.0 million, of which 53.2 million are adults and 32.8 million of them are currently in work; they account for 0.9 per cent of world population and 1.0 per cent of global employment.[iii] National economic output is around £2 trillion per year, which is 3.1 per cent of the global total ranking it sixth largest behind the United States, China, Japan, Germany and India.[iv] The once trading goliath now represents 2.1 per cent of global exports and 3.1 per cent of imports.[v]

CLICK TO VIEW: Britain's growth stunted since financial crisis

Despite the economic successes following the Thatcher reforms, the financial crisis of 2007/8 and subsequent austerity exposed a persistent productivity problem and national penchant for debt. In the decade before the crisis, Britain’s economy grew at a real annual growth rate of 2.7 per cent; in the ten years after, growth was 1.4 per cent.[vi] The United Kingdom ranks poorly among its supposed peers in the global productivity tables – and its relative performance has consistently deteriorated over recent decades. Since the financial crisis, growth in gross domestic product per hour worked has been a sedentary average of 0.3 per cent per annum – behind the likes of Italy and Germany.[vii]

Second, Britain is becoming less attractive as an investment destination. Its share of world foreign direct investment receipts, which admittedly can be a volatile metric from year to year, has fallen from 18.6 per cent in 1980 to 1.9 per cent in 2020. But even on the ‘stock’ measurement (which is more stable but less representative of recent trends), the share fell from 9.0 to 5.8 per cent over the same period.

CLICK TO VIEW: Cross-border banking share is on a slowdown

The United Kingdom is losing ground in portfolio investment. Its share of conventional fund management, which stood at eight per cent in 1998, had fallen to five per cent by 2019 – while the London Stock Exchange has seen a decrease of 30 per cent in the number of listed companies and 27 per cent fall in their market capitalisations between 2000 and 2023.[viii]

CLICK TO VIEW: United Kingdom's stock market share is waning

And it is less welcoming to the highest value footloose individuals and families. The advantages of the ‘non-dom regime’ have been pared back by recent governments looking for quick wins in the media even if the measures are questionable fiscally. Between 2008 and 2021, the number of non-domiciled taxpayers fell by 50 per cent.[ix] More generally, while the number of high net worth individuals in Europe increased from 2.9 to 5.2 million between 2009 and 2019, the levels have flatlined around the half a million mark in the United Kingdom.[x]

Third, the City of London is less of a significant conduit for international investment. The United Kingdom’s proportion of foreign direct investment outward stock in 2021 was approximately a third of what it was in 1980: 14.4 per cent compared to 5.2 per cent. Its share of global cross border lending has fallen from 20 per cent in 1998 to 15 in 2022.

CLICK TO VIEW: Share of outward FDI now a third of 1980's share

Fourth, Westminster and Whitehall are increasingly marginal in global geopolitical terms.

The United Kingdom no longer has the military assets to meaningfully project physical power unless as part of wider alliances with likeminded and better armed nations. In 2019, the total number of armed forces personnel, at 149,000, was a tenth of the size of the United States’ numbers and a twentieth of China’s.[xi] The armoured fighting vehicle capability of the British Army today is a fraction of what it was in 1990, with the number of main battle tanks dropping by nearly a thousand over thirty years to 227 now. Moreover, the nation’s diplomatic assets have been depleted; Foreign, Commonwealth and Development Office figures show that 11 consulates or offices were closed down or downgraded between 2016 and 2019 alone.[xii] And, regardless of the rights and wrongs of leaving the European Union, the way in which it was handled by successive governments has damaged Britain’s credibility in capital cities both on the continent and wider afield – while attempts to draw a line under Brexit have been hampered by the glossy black entrance of Number 10 spinning as fast as a revolving door in a Charlie Chaplin short.

Fifth, the power of Brand Britain is softening. The United Kingdom does punch above its weight in culture, sport and education – and its language (albeit the American version) has been adopted as the de facto professional lingua franca. It has soft power. However, even here there is no room for complacency. For example, it is losing share of the global tourism markets: falling from 2.2 per cent in 1995 to 1.7 per cent in pre-covid 2019.[xiii]  

British IFCs Sing A Different Tune

While British power and influence has been waning, the finance centres in the crown dependencies and overseas territories have broadened their horizons.

Although there remain strong business links with the City of London, there is reducing and often limited exposure to clients in the four home nations. For example, United Kingdom resident ultimate beneficial owners account for less than seven per cent of the total underlying value of active British Virgin Islands’ Business Companies. In Jersey, 21 per cent of funds and 29 per cent of banking liabilities originated from United Kingdom investors and depositors in 2010 – and the trust business is seeing the proportions of British settlors, beneficial owners and assets fall.[xiv]

The islands have developed a wide and diverse global customer base. The largest market for the British Virgin Islands is Asia. Organisations and individuals in China, Hong Kong and Macau are beneficial owners of an estimated 46 per cent of the total value, with 45 per cent of the underlying asset value located there. 20 per cent of the active BVI Business Companies have ultimate beneficial owners located in Latin America, and a further three per cent are in Africa.[xv] Asia is a growing market for Jersey’s international finance centre too, with 30 per cent of capital for Jersey-administered and domiciled funds originating from Asia (including the Middle East) in 2020, closely followed by North America at 27 per cent.

There continues to exist much support for the ‘one undivided realm’ with the United Kingdom among the crown dependencies and overseas territories, but the relevance and value of the constitutional relationship is a matter of debate and concern. We analysed news stories covering the relationship with the United Kingdom in their media. Those jurisdictions with international finance centres geographically closer to Great Britain tend to view the constitutional relationship more favourably. Nonetheless, half of all the article mentions were condemnatory, with topics largely including independence, the refusal of Royal Assents and the Commission of Inquiry into the governance standards of the British Virgin Islands’ public services.

CLICK TO VIEW: London sparks adverse comments in CDOTs

Is Britain A Broken Record?

Although written over four decades ago, the apocalyptic lyrics of London Calling – which reference nuclear accidents, food shortages and flooding – have renewed relevance today. Then, the United Kingdom was at a low ebb. And, again, today, Britain is on the back foot. Where does this leave the British affiliated islands?

If one were setting up an international finance centre in a small jurisdiction now, it’s unclear how much focus you would place on the United Kingdom as a potential market or even as a political ally. Growth markets are to be found thousands of miles to the east and south, while the key political decisions impacting future business are being taken in Washington, Beijing, Brussels and Paris – not London. There is value to English-derived common law and potential comfort for clients in having a highest court of appeal on Parliament Square opposite the Palace of Westminster. But many nations have retained this while securing complete political separation from the United Kingdom.

To be clear, we are not advocating for independence for the crown dependencies or overseas territories. This opens a whole new can of worms – but, in today’s world, more so for the United Kingdom. The wine bar and pub chatter of SW1 that assumes that ‘London only gives and the CDOTs only take’ fails to recognise the increasingly vital role that the offshore jurisdictions have in connecting British business with international capital – supporting trade, investment and jobs. Foreign investment mediated through the Cayman Islands in 2016, for instance, was £3.6 trillion.[xvi] Similarly, investment mediated by BVI Business Companies supported over two million jobs and contributed £10.0 billion to global tax receipts.[xvii]

London is calling, but Whitehall and Westminster need to listen to the offshore voices – not only for the sake of the islands but also for the United Kingdom.

 

 

Footnotes:

[i] The Institute for Fiscal Studies, IFS Fiscal Facts (The Institute for Fiscal Studies, London), 9 March 2023,  https://ifs.org.uk/taxlab/taxlab-data-item/ifs-fiscal-facts (Accessed 13 March 2023)

[ii] Office for National Statistics, Gross domestic product (Office for National Statistics, London), 2023, https://www.ons.gov.uk/economy/grossdomesticproductgdp (Accessed 12 March 2023)

[iii] Office for National Statistics, Mid-year population estimates 2021 (Office for National Statistics, London), 21 December 2022, https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/datasets/populationestimatesforukenglandandwalesscotlandandnorthernireland (Accessed 9 March 2023)

[iv] International Monetary Fund, Gross domestic product (International Monetary Fund, Washington), 2023, https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD (Accessed 7 March 2023) 

[v] United Nations Conference on Trade and Development, Merchandise: Total trade and share, annual (United Nations, Geneva), 2023, https://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?ReportId=101 (Accessed 12 March 2023)

[vi] Chris Payne, Consumer price inflation time series (Office for National Statistics, London), January 2023, https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23 (Date accessed 6 March 2023)

[vii] Organisation for Economic Co-operation and Development, Level of GDP per capita and productivity (Organisation for Economic Co-operation and Development, Paris), December 2022, https://stats.oecd.org/OECDStat_Metadata/ShowMetadata.ashx?Dataset=PDB_LV&ShowOnWeb=true&Lang=en (Date accessed 8 March 2023)

[viii] London Stock Exchange, Reports (London Stock Exchange, London), 2023, https://www.londonstockexchange.com/reports?tab=issuers (Accessed 6 March 2023) 

[ix] HM Revenue and Customs, Statistical commentary on non-domiciled taxpayers in the UK (HM Revenue and Customs, London), 28 July 2022, https://www.gov.uk/government/statistics/statistics-on-non-domiciled-taxpayers-in-the-uk/statistical-commentary-on-non-domiciled-taxpayers-in-the-uk--2#summary-of-key-statistics (Accessed 8 March 2023)

[x] Capgemini, World Wealth Report (Capgemini, London), 2020, https://www.capgemini.com/nl-nl/wp-content/uploads/sites/7/2020/07/World-Wealth-Report-WWR-2020.pdf (Accessed 8 March 2023)

[xi] The World Bank, Armed forces personnel (The World Bank, Washington), 2023, https://data.worldbank.org/indicator/MS.MIL.TOTL.P1 (Accessed 8 March 2023)

[xii] Sir Robin Niblett DPhil, How to turn ‘Global Britain’ from a slogan to reality (Chatham House, London), 11 January 2021, https://www.chathamhouse.org/2021/01/how-turn-global-britain-slogan-reality (Accessed 6 March 2023)

[xiii] World Bank, International Tourism (World Bank, Washington), 2023, https://data.worldbank.org/indicator/ST.INT.ARVL?locations=GB (Accessed 13 March 2023)

[xiv] Centre for Economics and Business Research, Jersey’s Contribution to Global Supply Chains (Jersey Finance, St Helier), October 2021. pp28-50

[xv] Pragmatix Advisory, Beyond Globalisation (BVI Finance, Road Town), March 2023

[xvi] Cayman Finance, The Cayman Islands: An Extender of Value to the United Kingdom (Cayman Finance, Cayman Islands), August 2019, https://caymanfinance.ky/wp-content/uploads/2021/06/UK-Placemat-Final.pdf (Accessed 13 March 2023)

[xvii] Pragmatix Advisory, Beyond Globalisation (BVI Finance, Road Town), March 2023