On 2 May, during a visit to the Channel Islands, Steve Williams gave a speech on “The Channel Islands and the EU: current priorities and future challenges”. Read Steve’s speech here:
Society of Trust and Estate Practitioners (STEP) Guernsey Branch
Evening lecture series, 2 May 2013
Steve Williams, Director of European Affairs, Channel Islands Brussels Office
THE CHANNEL ISLANDS AND THE EUROPEAN UNION:
CURRENT PRIORITIES AND FUTURE CHALLENGES
1. It is a pleasure to be with you this evening and an honour to have been invited to speak at one of your regular evening lectures. The lecture title is deliberately quite broad. That’s partly out of necessity: in front of such an expert audience I must get my disclaimer in early: I am not a specialist in the fiduciary sector. But I hope this is offset by providing you with a useful assessment of the broader European context of the work of the STEP members.
2. That disclaimer brings to mind an uncomfortable memory. I am a career diplomat by background. As a junior diplomat in the British Embassy in Oslo I accompanied the then Director General of the CBI, Sir John Banham, to a speech he was giving. I was sitting in the audience as he wisecracked that “a diplomat is someone who, generally speaking, is generally speaking”. I winced, but probably because it was rather too near the knuckle! So I hope that in giving a helicopter view, I nevertheless give sufficient granularity for it to be not too “generally speaking”.
3. For those of you for whom the Brussels office is itself something of an unknown, I’d like first to say a few words about who we are and why we were set up. I’ll then describe our main long term priorities and give a bit of the flavor of progress to date on each. I’ll give particular focus to some of the recent developments on tax and financial services, and what we might expect in the coming months. And finally, and more speculatively, I’ll look further ahead at some of the big ticket challenges facing the EU, the UK and the Channel Islands.
THE CHANNEL ISLANDS BRUSSELS OFFICE
4. The Channel Islands Brussels Office (CIBO) opened just over two years ago, in April 2011. We are a permanent team of three, and for those of you that know Brussels, we are in a modern office block on Rond Point Schuman right in the heart of the EU institutions. CIBO was set up with the strap line objective of promoting the Channel Islands interests in Europe. Many people have views on whether the EU is a “good thing” or a “bad thing”, often strongly held. But the fact is the EU exists, and like it or loathe it, it has a significant impact on our interests. That would be true in “normal” times. It is even truer in the far from normal times that the EU has been going through since the onset of the economic crisis.
5. Why? Firstly we are part of the EU for certain limited purposes, as set out in Protocol 3 (ie essentially trade in goods) so application of relevant EU laws is mandatory. And for the much wider range of things where we are outside the EU, what happens in the EU nevertheless often matters a great deal. This is for a variety of reasons.
– economic – our economies are closely tied to the European and especially the UK economy, most notably the umbilical link between our finance centres and the City, which is of course within the EU;
– practical – our air and shipping links are almost all to EU destinations;
– operational – police and judicial cooperation is largely with EU countries;
– good practice – even though we have no obligation to do, EU standards on things like bathing water quality often form a useful benchmark for our domestic policy considerations;
– and good neighbourly: we want to show that we are responsible members of the international community, on issues like international sanctions.
6. The promotion and protection of our interests in Europe is not just something that “the Brussels office” does in isolation. Despite unavoidable physical separation – which we work very hard to overcome through regular visits like this and through frequent teleconferencing – we are part of a wider team in both Guernsey and Jersey that is contributing to the delivery of our European policy objectives. We work hard to ensure that we are fully integrated into the Guernsey and Jersey public administrations of which we are a part. And we are accountable to and take our political direction from Ministers.
7. Part of our responsibility is to contribute to longer term professional skills development in both islands in European work. One element of that is to enable officers from both Islands to spend some time in CIBO. That’s why we’ve developed a programme of rolling secondments, usually of 3-6 months. This is proving invaluable for all concerned – for the individual, for CIBO, and for the parent department. Our most recent secondee was Emma Titterington who has just returned to Policy Council after spending 6 months with us.
8. A notable feature of CIBO is that we are – as the name suggests – a pan Channel Islands entity. We are jointly funded by the States of Guernsey and the States of Jersey. Our establishment as a joint office, rather than two separate Guernsey and Jersey Brussels offices, reflected the political judgment that Guernsey and Jersey can promote and protect their own interests in Europe better by doing so together with the other Bailiwick than by acting on their own. To the outside world, which thinks of “the Channel Islands”, it seems obvious that this should be the case. But seen from both Guernsey and Jersey, with their long proud histories and traditions, their different legal and fiscal systems, and their healthy local rivalry and competition, from the sports fields to the financial sectors, such a decision was a bold one.
9. We are pleased that we are regularly referred to as successful example of joint working. But we are not at all complacent, and we take seriously our responsibility to be a positive role model as both islands take forward their wider joint cooperation. Indeed, just as we were a manifestation of a political will in both Bailiwicks to work more closely together on international issues, our very existence has been a catalyst for further joining up. In July 2012, the two Chief Ministers met and committed both their governments to working even more closely together on international issues. This included the designation of Senator Bailhache in Jersey and Deputy Le Tocq in Guernsey as having a coordinating responsibility at Ministerial level for European affairs.
10. Finally, given today’s audience, I should also note that the financial services industry in both Islands has been among the strongest supporters of the two governments working more closely together on international issues. This reflects the fact that although on a commercial level, the two Islands are fierce competitors, one with the other, the external threats and opportunities are very much shared, and require a coordinated policy response at government level.
CURRENT PRIORITIES: WHAT DO WE DO AND WHY?
11. An important element of our work in the first few months, together with our colleagues in the Islands, was to start unpacking that strap line objective of “promoting the Channel Islands interests in Europe”. What are our objectives? Which are the most important? What is the interplay between them? Are some contradictory? Are there differences between Guernsey and Jersey, either in substance or in relative prioritization? How, by whom and with whom can we best deliver them? The result of our business planning was that we have grouped our work around three broad long term policy objectives: addressing the political perceptions of the Channel Islands, securing our interests in other sectors outside of tax and financial services, and influencing tax and financial services policy. Let me say something about each of these.
ADDRESS POLITICAL PERCEPTIONS OF THE CHANNEL ISLANDS
12. The first long term objective of addressing the political perceptions of the Islands is what I term “platform diplomacy”: the network building, awareness raising, and reputational management that we need to do in order to be able to deliver on specific sectoral priorities. The prejudices run deep: that we are tax havens, that we are one trick ponies, only interested in financial services, and that we grow rich at the expense of others. We have to keep chipping away methodically, systematically, and evidence based. We are continually refining, updating, and testing our core messages. And Ministers of course have a key role in this platform diplomacy.
13. And this leads me to another important point. There is sometimes a tendency to use “Brussels” as short hand for “Europe”. It is of course true that Brussels is the political capital of the EU, where the key institutions are based – the Commission, the European Parliament, the Council of Ministers. And engagement with each of those institutions is indeed a vital part of our work. But it is by no means sufficient. In order to promote our interests in Europe we need also to engage directly with the Member States in their capitals, supplemented by contact with their London embassies, because that is where national policies on the key issues that affect us are made. So we are making a real effort to strengthen the EU policy component of our bilateral relations with EU Member States.
14. In the past year CIBO has organized joint Ministerial visits by Guernsey and Jersey Ministers to Brussels, Paris and Dublin; and we have had officer level visits to Berlin, Stockholm and, shortly, to Helsinki. And there have been several important inward visits by EU Ambassadors to the Islands. Let us also not forget that the single most important Member State for us is the UK, so ensuring a good, open dialogue with all the key Whitehall departments as well as with the UK Permanent Representation in Brussels, is of crucial importance. And the second most important relationship is France, for obvious geographic reasons. We’ve been working hard to start to address the mis-match between the excellent cooperation which the Islands have with the neighbouring French regions, and the relative thinness of our relationship with the French central government.
SECURE INTERESTS IN AREAS OUTSIDE TAX AND FINANCIAL SERVICES
15. Under this work stream, we are looking to promote and protect our interests in respect both of EU initiatives that may require implementation under Protocol 3 (ie mandatory) and of initiatives that are outside Protocol 3 but which may offer opportunities for achieving domestic policy goals. The range of issues is large – transport, environment, data protection, sanctions, judicial cooperation, e-commerce, food labeling, animal and plant health, and many more. That is why regular re-calibrating of priorities is required so that we ensure that we are focusing on the right issues.
16. Let me say a word about aviation as a concrete example. Air links are vital for our Island economies – including of course for our viability as international financial centres. Although we are third countries for aviation purposes, in practice, to be able to operate these air links, we need to meet EU standards. There are a range of important aviation dossiers of key importance to us such as new arrangements for airspace management, updated rules on slot allocation at major airports like Gatwick, new security rules, and a revision of state aid rules which may impact on some of the UK and continental regional airports with which we have air links.
17. Sometimes it is necessary to prove a negative – to satisfy ourselves that something is not going to impact on us. An example is a recent meeting we had with the UK Department of Work and Pensions to horizon scan future developments in EU social security coordination. And sometimes it is not about policy or legislation, but access to networks – for example we are scoping whether and if so how we might be able to participate as third countries in some of the individual cross border projects on things like renewable energy and maritime planning for which the potential EU partners in France or the UK would have access to EU regional development funds.
18. In the same way that platform diplomacy is needed to deliver on sectoral priorities, so our sectoral work helps to amplify and give credibility to our reputational work, and to our ability to promote our interests in the field of tax and financial services. They give substance and credibility to our claim that we are not “one trick ponies” – that we really do have breadth and depth in our interests in Europe. As an example, HM Procureur, Howard Roberts, and his Jersey counterpart, Attorney General Tim Le Cocq, visited Brussels a few months ago and met with the Commission and the incoming Irish Presidency to discuss cooperation in the field of criminal justice. This was important in its own right, but was also valuable addition to our broader reputational message. It enabled us to demonstrate, convincingly, the contribution that the Islands make to international cooperation on asset recovery and mutual legal assistance.
INFLUENCE TAX AND FINANCIAL SERVICES POLICY
19. This brings me to the third long-term priority: tax and financial services, which remain core to our economic interests. In Europe tax has moved to centre stage politically, both nationally and at EU level, while on financial services the regulatory reforms in response to the crisis are still ongoing.
20. On tax, one only needs to look at the political debate in the UK and in France to see the impact on national politics. And at EU level, the fight against tax evasion, fraud and aggressive tax planning has featured prominently in successive meetings of Heads of Government and will do so again on 22 May, when there is another key EU Summit meeting.
21. Although we can – and do – explain that we meet international standards, and highlight the distinction between tax rates (on which there is no international consensus) and cooperativeness (on which there is), this is no longer sufficient. If any of you are Monty Python fans like I am, you might sometimes be reminded of the sketch from Monty Python’s Life of Brian “What have the Romans ever done for us?” .
“OK, but apart from being compliant with the EU Code of Conduct, committing to FATCA, being OECD white listed, being in the top tier of the Financial Stability Board, having a better record than virtually all EU Member States in meeting the key recommendations of the FATF on anti-money laundering, having tax crimes as a predicate offence for AML purposes for more than a decade, committing to the withholding and information exchange arrangements under the EU Savings Directive, having Tax Information Exchange Agreements and Double Taxation Agreements in place with the majority of member States, having tough general anti avoidance provisions in your domestic legislation, being leaders in the field internationally when it comes to the availability of information on the beneficial ownership of companies (according to the World Bank), providing significant net flows of liquidity and investment funds to the EU economy – apart from all that you are tax havens. “
22. It might be unfair, but it’s how it is. Active engagement is needed. We’re doing that. Let me give one concrete example – before then showing why we certainly cannot rest on our laurels.
23. In December the Commission published a recommendation to Member States on tackling tax havens (it wasn’t actually called that, but in effect that was what it was about). Although only a recommendation – and hence not binding on Member States – it could nevertheless have been potentially damaging for our interests if it had had a definition of tax havens which had us the wrong side of the tracks.
24. We devoted significant effort to trying to avoid this outcome. Intelligence gathering about Commission intentions. Analyzing the political imperatives. Targeted engagement at both political and senior official level with the Commission. Encouraging the UK to deliver supporting arguments. Explaining to the Irish. Ensuring an assessment of continued compliance with the Code of Conduct, as Guernsey successfully achieved in 2012 and Jersey had in 2011. And in all this ensuring that our arguments were rigorously evidence based: to extend the Monty Python analogy, to show exactly what the Romans have done for us.
25. The end result was a recommendation from the Commission which defined good global governance in tax in terms of meeting agreed international standards and a commitment to the principles and criteria of the Code of Conduct. On both elements we are the right side of the tracks. We cannot say that this good outcome was solely the result of our diplomatic efforts. But what we can say is that we are in a much better place than we would have been in had we done nothing.
26. But as a demonstration of why we absolutely cannot be complacent, just consider the past month. It started with the scandal of the then French Budget Minister, Cahuzac, resigning because he lied over a secret Swiss bank account, and with the “Offshore Leaks” story, with lists of offshore accounts including, as more embarrassment for President Hollande, his former campaign treasurer. But the political response has been rapid. 5 big member states – the so called “G5” (UK, France, Germany, Italy, Spain) – announced they would be piloting a multilateral automatic exchange of information facility, modeled on FATCA. 4 other member states have already said they will join it.
27. This week the UK has announced that the Overseas Territories have committed to joining the pilot, as has the Isle of Man. Guernsey has publicly expressed interest in joining and has asked the UK for further information. Jersey and Guernsey have already committed to automatic exchange of information with the UK under an Inter-Governmental Agreement similar to the one with the UK under FATCA. Luxembourg has said it will move to automatic exchange of information, at least under the EU Taxation of Savings Directive, something it has been resisting for years. Austria is still holding out but is looking more and more isolated, and there are mixed signals coming from the different Austrian coalition parties.
28. It now seems likely that with this new political momentum there is a realistic chance that the long standing block by Austria and Luxembourg on the extension of the scope of the EU Savings Tax Directive might finally be overcome at the 14 May meeting of EU Finance Ministers (ECOFIN) or the 22 May European Council. This would mean that the Commission would be given the green light to negotiate with Switzerland and other third countries, including the Channel Islands, an extension of the scope of existing arrangements. These existing arrangements cover only interest payments to individuals. Under the extended scope it would apply to trusts, foundations and life insurance products.
29. The G5 initiative shows that the game is already moving on. It is possible that there could soon be an initiative to establish in effect an EU FATCA, with much wider scope of automatic exchange of information than provided for even under the expanded EU Savings Directive. But deciding what is better done through the OECD and what through the EU will be important. It is worth noting that as the debate has evolved in recent weeks, the dividing lines between tax avoidance (which is legal) and tax evasion (which is not) are becoming increasingly blurred. The Starbucks/Google/Amazon scandal in the UK has given added impetus to the work in the OECD on base erosion and profit shifting. David Cameron has made clear that tax evasion and avoidance will be a priority theme of the UK G8 Summit on 17-18 June in Lough Erne. It is obvious that in this politically charged atmosphere there is a risk that the careful distinction in the Commission’s December Communication between cooperative and non-cooperative jurisdictions could once again get lost in translation.
30. All of this highlights the wisdom of the Islands trying to stay ahead of the curve. The Treasury and Resources Minister, Gavin St Pier, put it very well in his recent article for the STEP journal when he said: “Guernsey has absolutely nothing to fear from tax transparency. On the contrary, we welcome it…Our financial services industry and our trusts sector are so successful because of the skills base we have here. We have never had any kind of banking or other secrecy laws; and our place in the international financial system is not predicated on secrecy or non-compliance with tax laws.” That’s absolutely the right message.
31. I have concentrated on the developments around definitions of tax havens, automatic information exchange, and the Savings Directive because these are the most important for Channel Islands and also the most important for the fiduciary sector. But there are several other tax dossiers which we need to keep a close eye on.
32. First and foremost there is the Financial Transactions Tax (FTT) which is under negotiation for implementation by only 11 Member States under the so called enhanced cooperation provisions of the EU Treaties. But the proposal is highly controversial – it will impact on the integrity of the single market (mainly, it has to be said to the disadvantage of the participating 11 states) but it also has effectively an extra territorial scope, by applying to transactions conducted anywhere in the world, if the subject of the trade was issued in one of the participating states. The debate on this will continue to be heated in the coming months.
33. On much slower burns, but worth noting, are the proposal for a Common Consolidated Corporate Tax Base (CCCTB) and a proposal for updating the Directive on Interest and Royalties (IRD).
34. The issues relating to tax which I have just been describing are obviously of crucial importance to the financial services industry in the Islands, including the fiduciary sector. So to that extent the distinction between “tax” and “financial services” is slightly artificial in terms of a description of our priorities. But there are some quite specific issues relating to financial services which we are closely engaged on, over and above our work on tax. The response to the crisis, globally (by the G20) and by the EU, has been to a range of new regulation and regulatory structures to prevent a repetition. And the political backdrop to this has been of course that for many in Europe, it was the so called “Anglo Saxon model” of deregulation and excessive risk taking that was the cause of the crisis in the first place. And to those critics, the Channel Islands are seen as an extreme version of that – “the City offshore”.
35. In this politically charged and highly risk averse environment, our challenge has been to make clear that (a) contrary to the misperceptions, our financial centres are significant net providers of investment funds to the European economy and (b) where we can demonstrate that our regulatory rules meet standards equivalent to the EU’s, we should have fair access to the EU market as third countries.
36. The funds industry is crucial to the economies of both Guernsey and Jersey, so a top priority in the past two years since our establishment has been the Alternative Investment Fund Managers Directive. In December the implementing regulations for AIFMD – the detailed rules – were finally published by the Commission. Our initial assessment – and that of industry – was that on the basis of these proposed rules, the Islands should be well placed with regard to competitors. This result was achieved by careful, positive, targeted engagement – with the Commission, with the European Parliament, with the EU level regulator (ESMA), as defined on the slide by EU Commissioner Barnier, Sharon Bowles, Chair of the EP’s Economic & Monetary Affairs Committee, and Verena Ross, Executive Director of ESMA. We have worked closely with external allies like the City of London and Isle of Man Brussels Offices, and the EU level industry associations. But as with the Tax Communication, there is a long way to go, and we mustn’t be complacent. In particular we are still waiting for the Memoranda of Understanding with ESMA to be approved by ESMA.
37. There are a range of other financial services dossiers of interest to us, including the Statutory Audit Directive, the new Anti-Money Laundering Directive; the Markets in Financial Instruments Directive (MiFID), and the Single Euro Payments Area (SEPA).
THE CHALLENGES THAT LIE AHEAD
38. Let me finally have a forward look at some of the bigger picture challenges and uncertainties that lie ahead.
39. First of all the eurozone. As the recent fraught bailout negotiations with Cyprus showed, the crisis is very far from over. Slovenia is the latest country to have the amber light flashing over it. Spain remains in deep recession. The political stalemate has finally been broken in Italy. And the markets continue to keep a close watch on France. Meanwhile German decision making over the next few months will continue to be seen through the prism of the federal elections in September. The economic necessity of further integration by the eurozone countries in order to safeguard the single currency is accepted in principle. But as always, the devil is in the detail. Moves towards a single bank deposit guarantee scheme, and an agreed bank resolution arrangement to deal with failing banks are proceeding slower than many think necessary, and Chancellor Merkel has now indicated that this may need to be accompanied by Treaty change. Meanwhile the tensions between fiscal consolidation (ie austerity) and growth continue to play out, and the sweet spot of what is economically necessary on the one hand and socially and democratically acceptable on the other remains extremely difficult to find, as events in Greece and Cyprus have shown.
40. Secondly, the single market. Amidst all the problems, we should not lose sight of the fact that the EU is a market of over 500 million consumers with a combined GDP of thirteen trillion euros. It will grow further on the 1 July with the accession of Croatia as the 28th Member State. And the prospect of joining the EU remains a powerful driver of reform in the Western Balkans, as shown by the recent historic agreement between Serbia and Kosovo brokered by the EU. Important aspects of the single market have yet to be completed, most noticeably in the field of services. The path to growth has to include a much faster pace towards completing these important gaps in the Single Market. But it also has to include reinvigorating global trade. In that context a potentially crucial question in the next 2 years will be whether or not the EU and the US can achieve what they have now, finally committed to negotiating – a transatlantic free trade agreement. It is fraught with difficulty – the protectionist agricultural lobbies on both sides of the Atlantic to name but one. But if it could be achieved it could be a real game changer – economically, but also politically, including in the UK.
41. This leads me to my third big ticket theme: the UK. At present there is an important technical exercise being undertaken by the UK government on the so called “Balance of Competences Review”. This is looking at how existing EU powers are used, and what advantages and disadvantages this brings. The Channel Islands are following this closely, and engaging actively with the relevant Whitehall departments. But this is of course only the warm up act. The real question is what will happen after the next UK General Election in 2015 and also in the Scotland independence referendum in 2014. David Cameron has committed to hold an in-out referendum in 2017 if he wins the election, but on the basis of having negotiated an improved “deal” for Britain – which would then enable him to recommend a “yes”. There is considerable uncertainty. Who will win the election? Is an improved deal negotiable? If so, what are the chances of a yes vote? If the answer is “no”, what would be the new basis for the relationship between the UK and the EU?
42. And this brings me to the final big ticket theme: what might all this mean for the Channel Islands? I was working in Eastern Europe in 1987 and did not see the fall of the Berlin Wall 2 years later, I was London in 2007 and didn’t see the crash a year later, and I was in south east Europe in 2009 and didn’t see the Arab Spring coming. So with that a track record like Mystic Meg, I am loathe to make predictions. I comfort myself that few others, hand on heart, could say that they saw these momentous events coming either. But the fact that the future is uncertain, is not a reason for being unprepared. The key is always to be regularly testing and re-testing our assumptions, having resilient risk mitigation measures in place, and above all being clear about what our own long term interests are.
43. Clearly if the UK were actually to leave the EU, this would mean the end of Protocol 3, so we – like the UK – would need to negotiate a new relationship with the EU, and also with each other (UK-Channel Islands). But even if the UK stays a member of the EU, there could be a treaty re-negotiation which could mean that we could look afresh at Protocol 3 if we so wished (linguists will note lots of conditional tenses in that sentence!). In any event, viewed purely from an economic perspective (ie putting the politics into artificial suspended animation) the next few years present a good opportunity for a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). What is the balance and shape of our economies likely to be over the coming years? How might the balance between the financial services and non-financial services sectors evolve? Where will our main markets be? What will be the relative balance between the UK, rest of Europe, and rest of world? Those are what Donald Rumsfeld famously called the “known unknowns”.
44. I hope that this has given you some insights into the work of the Brussels office – who we are, why we were set up, what we do and why and how we do it. I’ve made clear that the “we” is not just the Brussels office, but us working as part of a much wider team – Ministers, officials, regulators, industry, others – to promote and protect our interests. I’ve described the three main long term objectives – reputation management, tax and financial services, and other sectors, and how the three are all interlinked. I’ve dwelt in some detail on the current state of play on tax and financial services and the prospects for the coming months, in what is a fast changing global and European environment. And I’ve attempted a cautious look into the crystal ball at some of the bigger challenges that lie ahead – for Europe, for the UK and for the Channel Islands. I hope it’s given you some food for thought and has not been too “generally speaking”! Thank you for your attention.