Financial Centres in Europe

Post-Crisis Risks, Challenges and Opportunities

R. Ayadi, Emrah Arbak

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137275042
• Topic: Negocios y empresa
• Subtopic: Finanzas corporativas

Assesses to what extent increased international cooperation could help selected financial centres in Europe respond to the future risks and opportunities facing them. The book identifies challenges that the jurisdictions face in coming years by means of representative samples and systematic comparisons of financial centres.

1

Introduction

Financial centres are in constant evolution in order to accommodate an increasingly integrated global economy and an ever more challenging environment. As domiciles for a range of financial services, these jurisdictions, which serve as intermediaries between mostly non-resident clients and international and local financial institutions, big or small, have grown over the last decades as a direct result of the increasing importance of financial markets across the globe. Traditionally, many of the smaller financial centres have been identified as ‘offshore’; this term refers mainly to the low-tax, flexibly licensed and less onerous regulatory regimes that have characterized some jurisdictions. The term has also been used to refer to centres with strict confidentiality laws, in some cases, and to the ability for institutions or corporate structures to operate through a centre without a substantial physical presence in it. The centres defined by these characteristics have been used by international financial players and by investors and individuals to accommodate their financial and corporate needs.

Before the eruption of the 2007/2009 financial crisis, efforts had been made by large financial jurisdictions, and also a number of smaller ones, to improve transparency, information exchange about taxation matters, and the quality and outreach of financial regulations. Efforts were also made, at a moderate speed, to promote global coordination and cooperation in regulation, supervision and taxation. The financial crisis was a turning point; indeed the risks posed by an increasingly globalized financial system have impelled policymakers across the globe into speeding up their moves to close the gaps in global regulation and taxation. These global policy agreements have subsequently driven all jurisdictions to adapt their regulatory and taxation frameworks to respond to market changes and increasing levels of risks.

The political pressure to implement these reforms has increased exceptionally strongly, especially in relation to some of the jurisdictions on the perimeters of the onshore nations which spearheaded the regulatory reforms. This led to an intensification of the efforts to enhance tax information exchange and coordination in dealing with tax practices harmful to the established financial centres. At the same time, most of the advanced economies increased their public expenditure to counter the impact of the crisis on their economies and financial markets. This in turn led to fiscal concerns, in some cases intensifying some of the existing pressures arising from an aging population and increasing trends in public expenditure.

Another challenge for financial centres has been the shifting of global wealth and economic activities, which are moving increasingly from the traditionally affluent Western countries to certain emerging economies. The access advantages provided by some of the regional centres in and around these emerging markets have given them a first-mover advantage over the Western financial centres. The level of competition is likely to increase substantially in the coming years, provided that these markets continue to maintain their trend growth in economic activity and wealth.

Against this unsettled backdrop, this book aims to assess to what extent the increasing international cooperation in regulation and taxation could help financial centres in Europe to better respond to risks and opportunities facing them in the future. At the same time, the book aims to identify other challenges faced by the jurisdictions in the upcoming years.

A representative sample of small jurisdictions, mainly in Europe, was chosen as a basis of the study, comprising:

1.  Andorra

2.  Cyprus

3.  Gibraltar

4.  Guernsey

5.  Isle of Man

6.  Jersey

7.  Liechtenstein

8.  Luxembourg

9.  Malta.

Systematic comparisons were drawn with other financial centres, comprising:

1.  Bermuda

2.  Cayman Islands

3.  Hong Kong

4.  Ireland

5.  Singapore

6.  Switzerland

7.  United Kingdom.

The book does not aim to undertake an overall assessment, nor is it an analytical critique of any particular jurisdiction; these tasks are amply carried out by other international organizations and standard-setters, such as the International Monetary Fund (IMF), World Bank (WB), Financial Action Task Force (FATF), and the Organisation for Economic Co-operation and Development (OECD).

Instead, the book endeavours to give an understanding of the conditions and factors that have contributed to the current standing of these jurisdictions, with the ultimate aim of shedding light on the future opportunities and challenges facing them. The assessments of the international organizations are nevertheless used for the purpose of understanding their underlying strengths and weaknesses.

Chapter 2 begins with an overview of the evolving nature and the role of the selected jurisdictions. The perception of these jurisdictions is often shaped by political and academic debate; while some argue that these financial centres serve the purpose of attracting financial flows to their neighbouring onshore economies, others claim that they serve as a safe haven for criminal and illegitimate activity. The academic literature has also tended to provide a divergent view, finding evidence for increased avoidance or evasion activity in some cases, while highlighting the positive spillovers to surrounding economies in others.

Chapter 3 turns to a discussion of compliance and the responses of the financial centres in the light of the development of international standards. As the evidence summarized clearly shows, most selected financial centres have implemented international standards. However it is possible to distinguish between early movers from others. In particular, some of these jurisdictions appear to have taken – at least in some cases – a more proactive approach, possibly in a deliberate effort to avoid such conditions and remain at the front of the pack. Others have been more response-driven, implementing change only after the revelation of highly publicized events and damaging disclosures.

Chapter 4 turns to the risks and opportunities awaiting the selected financial centres in the upcoming years and decades. The chapter includes a discussion of the regulatory changes in most developed countries, especially the changes originating from the EU, amidst calls for enhanced global coordination, which were heightened during the financial crisis. It also identifies the deteriorating fiscal positions of larger advanced countries as another key determinant of increasing international pressure to close global regulatory and taxation gaps. The rise of new economic powerhouses such as China is also likely to challenge the business models and change the competition among the financial centres worldwide.

The main idea that emerges from the discussions in that chapter is that increasing attention paid to all jurisdictions (not just to a select few), gives them an opportunity to comply with the international standards and practices without losing business to the growing competition. The shifting of global wealth and economic activity towards emerging economies can represent a further opportunity for the more reputable jurisdictions that will likely benefit from serving as a bridge between investment opportunities in Europe and the wealthy investors in the emerging markets. In short, the book argues for the authorities of the European financial centres to create these opportunities by striding forwards in a framework of cooperation.

2

Evolving Nature and Scope of Activities

Almost all of the financial centres considered in this book have developed since the 1960s in response to the globalization of capital markets and wealth generation. They have also benefited from restrictions imposed to limit international capital flows and to improve balance of payments in the host countries. Particularly prevalent in the US, the relevant policy actions included greater reserve requirements for banks, binding interest rate ceilings, and restrictions on the range of products and services that banks could offer.¹ More generally, several developed countries, most notably the UK, implemented tax hikes in 1960s and early 1970s, especially on corporate income and investment earnings. These developments led financial institutions and businesses to look for alternative venues, to conduct their transactions elsewhere.

The universal use and acceptability of the US dollar in international business and financial transactions quickly led to the emergence of an international market in dollars, or the so-called ‘Eurodollar’ market.² Thanks to its historical position as a global trade centre and its light-touch regulatory stance towards external financial transactions, the City of London sprung up as the leading market for dollars outside the US by the mid-1960s. Other centres followed suit by introducing regulatory and fiscal regimes to facilitate the operation of foreign banks. By the end of the 1960s, Singapore launched its own alternative for the Asian market, the ‘Asian Dollar Market’ (ADM).

In the meantime, a number of financial centres in Europe, including Switzerland, Luxembourg, the Channel Islands and the Isle of Man, attracted the deposits of non-residents, encouraged either by bank secrecy laws in the case of Switzerland, or by favourable tax regimes in the case of the Channel Islands and the Isle of Man. Other jurisdictions closer to the US, such as the Bahamas and the Cayman Islands, also introduced regulatory regimes that made it easier for US-based banks to incorporate banking facilities on the islands, providing regulatory and fiscal advantages to the parent institutions by overcoming the interest rate ceilings and other restrictions on banking products.

By the 1980s, most industrialized countries retracted the Depression-era regulations that had triggered the development of these jurisdictions. Reserve requirements, interest rate ceilings and more generally capital controls were rolled back, in exchange for more liberal policies that saw the rapid globalization of financial activities and markets. Meanwhile, the US and Japan developed their own foreign banking facilities, effectively providing more competition to the existing offshore jurisdictions. The US established its International Banking Facilities (IBFs) in 1981, which were allowed to receive deposits from and provide loans to non-residents or other IBFs. These banking units were exempt from reserve requirements and depositary insurance premiums, and were subject to a separate fiscal regime. In a similar vein, Japan introduced the Japanese Offshore Market (JOM) in 1986, with similar characteristics.

The deregulation wave of the 1980s and 1990s did not lead to a collapse of offshore jurisdictions. Most of them, especially those located around the US and Europe, used their first-mover advantage to became more specialized in certain activities, such as captive insurance, protected-cell companies, special-purpose entities and other vehicles. Businesses and institutions in larger financial centres continued working with these centres due to regulatory flexibilities, know-how and familiarity. Meanwhile, tax advantages became increasingly important, particularly for high net worth people and foreigners living in the neighbouring onshore economies, who incre...

Table of contents

• Cover
• Title
• 1 Introduction
• 2 Evolving Nature and Scope of Activities
• 3 Compelling International Initiatives
• 4 Risks and Opportunities
• 5 Conclusions and the Way Forward
• 6 Appendix I: Survey of Selected Financial Centres
• 7 Data Annex
• Notes
• References
• Index