Brexit The Implications www.jerseyfinance.je Factsheet
P2 Brexit - The implications Brexit - The implications P3 Introduction Executive Summary The referendum has been held, the British people have had their say, and they have chosen to leave the European Union (EU). A British divorce from the EU is unchartered territory as no member has ever before left. Whilst financial markets are likely to be faced with a period of some volatility, history has shown that Jersey has dealt well with this in the past and will do so again. Article 50, the legal means by which the UK will leave the EU, is unlikely to be triggered until a new Prime Minister and Cabinet are in place, which David Cameron has indicated he would like to achieve before the Conservative Party Conference in the first week of October. Jersey will have no direct hand in the negotiations for a new framework of relations between the UK and the EU, and yet given the UK is our closest and most significant trading partner, there will undoubtedly be implications in terms of both risks and opportunities for the Island s finance industry which is estimated to facilitate investment flows into the UK and the rest of the EU to the tune of some 800 billion. Prime Minister Cameron has accepted the result of the referendum and announced that he will step down to allow fresh leadership to commence negotiations with the EU in relation to the British exit. The UK will need to provide notice under Article 50 of the Treaty on European Union which then triggers a two-year negotiation window, but in terms of legal status the UK will remain a member of the EU for at least the next two years. Jersey s constitutional relationship with the UK will not be affected by the result of the referendum, nor is it envisaged that the Brexit will impact on Jersey s existing market access rights. Jersey s finance industry typically gains access to EU markets by means of EU legislation providing for third country access in respect of which the Island demonstrates equivalent standards. The Government of Jersey have confirmed that they believe the Island s best interests lie in maintaining the substance of our current relationship with the EU, as set out in Protocol 3, and with the United Kingdom. In the short-term, uncertainty could result in the reduction of investment flows into and out of the UK. However the increasingly global outlook of Jersey s finance industry means the sector is well placed to ride any such short-term UK contractions. Longer-term, the traditional strengths of the UK should result in it continuing as a major finance centre and a desirable destination for foreign investment. Jersey will continue to be a key functionary as investment flows return. Furthermore, Jersey appears well positioned to continue gaining future EU market access given the EU s commitment to attract investment from across the world.
P4 Brexit - The implications Brexit - The implications P5 The Impact of Brexit on Jersey s Relationship with the EU Jersey s existing relationship with the EU The relationship between Jersey s finance industry and the EU is one of scale and substance. In 2013, Capital Economics estimated that over 200 billion of assets managed in Jersey originated from EU markets (excluding the UK) and some 22% of the total assets managed were being put to work within the EU. While Jersey is not a member of the EU, some EU legislation applies to the Island to the extent it is covered by Protocol 3 to the United Kingdom Treaty of Accession to the European Economic Community. In broad terms, Protocol 3 brings Jersey within the Customs Union, and therefore essentially within the Single Market, for the purposes of trade in goods. However, the Island retains the status of a third country outside the EU in all other respects. Most relevant for Jersey is the fact that Protocol 3 is silent on the trade in services and the Island thus has third country status for the purposes of EU financial services legislation. Typically, Jersey s finance industry gains access to EU markets by means of EU legislation providing for third country access, granted after the assessment of whether the Island has regulatory (and other) standards in place that are considered equivalent to the relevant EU legislative counterpart. Not all EU legislation provides for third country market access and, similarly, Jersey does not apply to be assessed in respect of each piece of legislation due to the finite resources available to the Island s government and regulator. However, Jersey does implement and abide by an array of EU legislation under these third country access rules, and does so entirely independently of its relationship with the UK. A recent and much discussed example is the Alternative Investment Funds Managers Directive (AIFMD), in respect of which Jersey was among the first jurisdictions recommended to be provided passport rights to market alternative investment funds into EU Member States. The withdrawal from the EU by the UK will result in the UK s Treaty of Accession no longer having legal relevance; Protocol 3 will simply fall away once the Treaty has been rescinded. It is expected that there will be a period of at least two years before the British/EU divorce, and Protocol 3 will remain in place during that time. As Jersey is already largely free to take suche legislative measures as it deems necessary in a wide range of areas including but not limited to immigration, social security, education, health and employment the ending of Protocol 3 would not suddenly derestrict the Island s policymakers. For the finance industry specifically, most European business relies on the above discussed third country access rights. As these typically stem from the Island having demonstrated equivalence to EU standards, it is not envisaged that existing market access rights will be impacted. Indeed, the whole point of third country passport rights is to create equivalency of regulation with trading partners situated outside the EU. Regarding future EU market access, there are two factors which could work in Jersey s favour. Firstly, the 2015 European Commission Green Paper on Capital Markets Union and the subsequent Action Plan stated that a key interest for the EU was to attract investment from across the world. Jersey s finance industry already facilitates significant investment into the EU and it is difficult to see what incentives Brexit will create for the EU to move towards more protectionist policies and prevent this from continuing into the future. Secondly, while Jersey currently benefits from having Britain as an influential ally inside the EU negotiating on its behalf, the Island could potentially reap even greater benefits by having a powerful global player joining it at the negotiating table and seeking third country access to new EU financial services legislation. With the above in mind, Jersey s finance industry can expect its relationship with the EU, in terms of market access, to continue largely unaffected.
P6 Brexit - The implications Brexit -- The implications P7 The Impact of Brexit on Jersey s Relationship with the UK Jersey s existing relationship with the UK Jersey is a dependency of the British Crown but not part of the UK. The Island has its own elected government and retains responsibility for all matters apart from defence and international diplomacy, which remain within the purview of the United Kingdom. It is not represented in the UK parliament nor does UK law ordinarily extend to Jersey. Jersey remains one of the UK s closest trading partners, a relationship that stands independent of the UK s membership of the EU. In 2010 alone, the Island imported roughly 1.6 billion in goods and services from the UK, while exporting approximately 1.2 billion. It is unsurprising that Jersey, being an island, is a net importer of goods. However, Jersey is a net exporter of services to the UK, reflecting the singular importance of financial services to the Island s economy and its relationship with the UK. The value held in Jersey trusts, banks, funds and SPVs which is invested in assets located in the UK totals almost half a trillion pounds and represents close to 5% of the UK total of foreign owned assets. Such investment is estimated to support 180,000 UK jobs. Impact of Brexit The constitutional relationship of Jersey to the UK exists wholly outside the UK s membership in the EU. Withdrawal of the UK from the EU should therefore have no effect upon the Island s relationship with the UK. The importance of FDI flows into the UK should not be underestimated; UK Trade and Investment have reported that the UK is the largest net recipient of FDI inflows in Europe, a large amount of which will be facilitated or sourced from within the EU. With the UK renegotiating its trade agreements with EU nations, Jersey s stable relationship with the UK could result in investment that would once have flowed through EU Members instead being facilitated through Jersey. This would further mitigate the impact of any short-term decrease in UK investment activity. In the longer term, the Island would also have an important role to play. Jersey s finance industry already sources a significant proportion of the assets it manages from places such as North America (7%) and the Middle East (5%), much of which is invested into the UK. With the UK likely to seek to build new, non-eu, trading relationships in a post-brexit world, Jersey has an opportunity to build on this expertise to facilitate increasingly geographically diverse cross-border investment flows into the UK. The UK is a key beneficiary of Jersey s product offerings and expertise, and those skills will become even more valuable in the future. The UK will need Jersey every bit as much in the post- Brexit world as it does today.
P8 Brexit - The implications Brexit -- The implications P9 How a UK Exit Would Work The process for withdrawal On 23 June the UK public had the long-promised opportunity to have its say about whether the UK should remain in the EU or leave. While the outcome of the referendum is not legally binding, it would have been politically untenable for the government not to respect the will of the people and the Prime Ministers announcement on the morning of 24 June confirming the UK would leave the EU was expected. In order for the UK to leave the EU, notice must be given under Article 50 of the Treaty on European Union and the UK would cease to be a member of the EU: Two years from the date of its notification; An earlier date if agreement is reached before the passing of two years; or Such later date as may be agreed by unanimous consent of the European Council and UK. The Prime Minister has indicated that article 50 is likely to be invoked shortly after the Conservative Party Conference in October 2016. The two-year window applies only to negotiations for withdrawal from the Union. While Article 50 envisions those negotiations to include discussions on a future framework for UK EU relations, such a framework may well take longer than the two years to be agreed. Model EEA + EFTA (Norway) Bilateral agreements + EFTA (Switzerland) Access to Single Market Yes Formal voting rights on EU legislation No, but informal consultation on new legislation Ability to set own trade policy What a future UK EU relationship may look like Much will depend upon the type of relationship the UK negotiates with the EU post-exit. There are several potential models based on the relationships that have evolved with a number of countries close to, but still outside, the EU. Alternatively, the argument is made that the UK s economy is sufficiently different from that of countries like Norway and Switzerland that any future framework would ultimately be tailor-made to the UK's particular economic characteristics, trade levels and political goals. The following table, prepared by TheCityUK, provides an overview of some of the existing alternative frameworks for relations between the EU and non-eu countries that may provide a model template for future UK EU relations. What is clear at this stage is that a consensus has yet to emerge as to the optimal form a future UK EU relationship will take as so much hinges not just on economic factors, but competing political tensions within the UK and within the EU itself. Accordingly, it is difficult to state with any confidence how the UK s long-term balance of trade will evolve. Contribution to EU budget Free movement of people Passporting Yes Yes Yes Partial Partial No Yes Partial Yes No Impact of Brexit on the UK Short term At present, only 15% of UK trade is with countries that are not members of the EU or are not covered by EU trade agreements. The EU already has in place preferential trade agreements with 52 countries, and is in the process of negotiating similar agreements with another 72. Taken literally, this suggests that the UK may need to re-negotiate some 124 bilateral trade agreements in addition to negotiating a trade agreement with the EU as a whole in its new status as a third country. Additionally, the UK s law draftsmen could become very busy. EU directives must be enacted and incorporated into the domestic legal framework of each Member State. Having already been incorporated into UK law, existing directives will not therefore need to be immediately reconsidered. In contrast, EU regulations automatically had, and will continue to have until the UK formally leave the EU, legal effect in UK domestic law without further enactment. As they have not been enshrined into UK law, some 12,295 regulations may need to be considered by the UK. In the short term therefore, the UK faces an uncertain future as it grapples with establishing new relations with both Europe and its other trading partners around the world. There could be a period of legislative uncertainty and these factors combined could result in the temporary reduction of investment flows into and out of the UK. Long term There will be bumps in the road initially, but in the long term, a robust and economically valuable relationship between the UK and the EU is likely to be strong. The City of London is the financial heart of the EU and it plays a vital role in facilitating business in other European financial centres such as Frankfurt. Access to the EU Single Market has been central to the City s growing financial preeminence over the course of some three decades. The UK finance industry accounts for more than 10% of UK GDP and employs in excess of two million people. Not surprisingly, it is the largest tax contributor to the UK economy. Looking beyond finance, the EU is the UK s major trading partner, absorbing 44% of the UK s exports, some 223 billion, and delivering 53% of the UK s imports, totalling 291 billion. While there will be initial hurdles to clear over details of trade arrangements, the EU is unlikely to punish one of the biggest global consumers of EU manufactured goods and services through the imposition of tariffs. Looking beyond to global horizons, the traditional strengths of the City and the UK more generally, finance and banking expertise, a world-class education system and a highly-qualified labour pool, along with the international dominance of English as the language of business, could well mean that, in the medium to long term it will be business as usual in the UK. Out campaigners also argued that the UK could emerge without some of the more onerous regulatory burdens that come with EU membership, resulting in a more agile and cost-competitive finance industry. Customs Union (Turkey) Access to the EU internal market for goods No Partial No No No FTA No No Yes No No No Bespoke UK solution??????
P10 Brexit - The implications Brexit -- The implications P11 Relevance to Jersey The decision by the UK to leave the EU inevitably means a period of uncertainty as a new relationship with the EU is agreed and new trade agreements are negotiated (within and outside of the EU). In the short term, such uncertainty could suppress growth and businesses may put large projects on hold. Consequently, while it would not be altogether surprising if Jersey experiences a temporary slowdown in business activity facilitating investment into the UK, the impact on Jersey s finance industry is likely to be minimised due to the industry s increasingly global outlook. Indeed, other uncertainties surrounding Brexit may result in an influx of funds into Jersey looking to seize opportunities outside the UK until the dust settles in the UK. The sources of Jersey s business increasingly extend beyond the UK and are truly global, with the majority of assets held, administered or managed locally being located in jurisdictions other than the UK. The steady diversification of the Island s finance industry offerings will stand it in good stead, even if the UK economy stumbles in the short term. In the longer term, the UK s infrastructure and expertise mean there is every chance it will remain the world s leading jurisdiction for financial services, and that can only be advantageous to Jersey. If the UK does emerge as a stronger, more agile global competitor, Jersey will stand to benefit as capital flows both into and out of the UK return. The Impact of Brexit Conclusion Jersey s economic ties to the UK have a long history and they remain strong with the flow of capital from Jersey into the UK continuing apace. Assets managed in Jersey by location of ultimate beneficiary 40 % Rest of the world 16 % EU 44 % UK Despite the UK voting to leave the EU, given the historic primacy of the City of London as a global financial centre, there is little reason to believe capital flows into London from Jersey will be substantially disrupted in the longer term. Therefore Jersey can be expected to continue facilitating significant investment into the UK. In the short term, investment flows into and out of the UK may decline. However, with the increasingly global outlook of Jersey s finance industry, the Island is well placed to cope with any such bumps in the road. Regarding the Island s relationship with the rest of the EU, the finance industry's access often relies on being assessed as having equivalent standards to Member States. It has done so in the past, and those assessments should remain, and thus there appears no obvious reason that it shouldn t do so in the future. There will undoubtedly be a period of disruption and uncertainty in the UK and Europe. However, investment flows will continue, and Jersey will continue to play a key role in facilitating such flows.
Brexit - The implications P12 About Jersey Finance Jersey Finance has been run as a not-for-profit organisation since it was formed in 2001. It represents and promotes Jersey as an international financial centre of excellence. It is funded by members of the Island s finance industry and the States of Jersey Government, and has offices in Dubai, Hong Kong, Mumbai and New Delhi along with representation in London and a CBBC Launchpad in Shanghai. www.jerseyfinance.je www.youtube.com/jerseyfinance www.twitter.com/jerseyfinance www.linkedin.com/company/jersey-finance Disclaimer This document is provided for general information purposes only and does not constitute or offer legal, financial or other advice upon which you may act or rely. Specific professional advice should be taken in respect of any individual matter. Whilst every effort has been made to ensure the accuracy and completeness of the information contained herein, Jersey Finance cannot be held liable for any error or omission.